Market Update – We’re on the ball!

Portfolio Performance

Whilst Jason is leaving us to find a warmer climate, we are hopeful that he leaves some sunshine behind, which is much needed to lift the spirits after a disappointing performance from England yesterday evening! This is the case for football, however the same cannot be said for UK equities as the FTSE 100 has reached a peak over the last month. Our portfolios have held up well against benchmarks and our year to date performance for the OBI Focus 5%, 6.5%, 8% and 10% portfolios are currently 3.59%, 3.81%, 2.90% and 3.24% outperforming their respective benchmarks.

Over the last week, volatility in the markets has slowed down. We have seen an increase in positive sentiment with investors digesting the news regarding global monetary policy, which we will discuss in this update.

ECB Action – will Europe be man of the match?

Keeping in line with the theme of football, over the last few weeks we have seen ‘manager’ Draghi change his teams tactics for the Eurozone. In other words Draghi has introduced somewhat unconventional monetary measures including the introduction of negative deposit rates. Deflationary pressures in Europe have been problematic and a struggling ‘team’ requires this well needed boost which should prove to be positive for European equities. They have so far fared well, but can they become ‘man of the match’ and can their performance continue for the rest of the year? We hope so; European equity valuations are still below long term averages and we therefore expect to see more upside from the region, justifying our current overweight positioning.

England – DE-fence!

Mark Carney and the Bank of England have hinted at an earlier than expected rate rise in the UK which is positive and suggests that we are moving from recovery in to an expansionary phase of the economic cycle. What’s often good for the economy is not always perceived as such by the markets. We expect that UK small and mid-cap equities will continue to be the driver of growth in the UK stock markets but we are currently taking a defensive position by adopting a short on the FTSE 100. Based on technical charting, large cap equities are trading at the high end of the range in our opinion and although momentum has slowed, we believe we may see some more immediate downside risk in the short term. As such, we retain our position as a hedge against this risk.

Fed Action – the U.S. is our substitute

The fed have provided a more upbeat message to the markets and Janet Yellen’s comments continue to be rather dove-ish. This has proved to be positive for U.S. equities, however we currently retain our underweight positioning for now as we have identified better value opportunities elsewhere. The U.S. is similar to the UK in that both markets are trading at the top of the range. However, an eventual rate rise in the U.S. should mean a stronger dollar which ought to feed through to domestic U.S. equities. For that reason we keep the U.S. on our radar but maintain an underweight position at this stage, awaiting the right time to call them back on to the pitch!

Emerging Markets – an injured player returning to the game

Emerging markets (EM) have been an injured player over last year following the Fed’s tapering announcements in the summer of 2013. Quantitative Easing in the U.S. has meant that investors have flooded money in to EM over the years with the hope of achieving a higher return. The Fed tapering announcement proved to be negative for the region and as a result we saw large outflows last year. Nevertheless, investors are beginning to revisit the sector due to low valuations and an underweight positioning in most investor portfolios. EM has therefore been a top performer year to date and we retain a tactical exposure to the region.

Summary

We remain positive with regards to global equity markets this year and our outlook has not changed. We continue to see opportunity in the markets and believe that there is still a lot of value to be found. Our concentration on being in the right asset at the right time remains the focus of our proposition. For us it is important to identify the ‘key players’ and ‘strikers’ for 2014. On that basis we are identifying various tactical positions to take advantage of short term valuations and volatility, which we hope will be our ‘star players’ for 2014.

The chart below highlights the performance of our portfolios over the last 12 months. If you have any queries, please feel free to direct them to the team, otherwise have a great weekend.

Total Return Bid-Bid line chart over 12 months (from 19 June 2013 to 19 June 2014) from UK IMA universe

140620market update

All the very best,

Asset Management Team