In our last market commentary, we talked about volatility in the markets and the impact of short term noise. Since then, we have increased our allocation to equity at the end of January when markets were at a low and have seen a rebound. That rebound has been so fast, that at the end of last week we added some protection into the portfolio in the form of a FTSE short, which means that as the FTSE falls it will make money. Although we have applied this we have not sold any other positions as we do not want to overtrade the portfolio and we have no concerns about the economy and therefore the UK market continuing to expand in the medium term.
This short is a natural hedge to reduce volatility as all the indicators are that the market will pull back from where it is today. When that happens, we will reverse the position and take any available profits and reapply the FTSE tracker element of the portfolio and track it back up.
We have done this on the basis that technical charting and data has indicated to us that we will see a short term market correction and the FTSE fall over the next couple of weeks. On that basis we want to protect portfolios against this short term risk by switching the tracker in to a short FTSE ETF (effectively making a return if the FTSE falls) and smoothing out some of the volatility in the portfolios. The position will not reduce all volatility; it will though provide a natural protection and balance out falls expected elsewhere in the short term.
To confirm this was not a full rebalance it was a tactical switch from the FTSE tracker (15% of the portfolios) in to a FTSE short and we intend on switching back in to the FTSE tracker once markets have fallen and begin to pick up momentum once again. Our portfolio performance currently remains strong and is detailed in the table below.
YTD we have seen Sterling strengthen against all major global indices because of forward guidance and an expectation that interest rates in the UK will rise quicker than many other economic areas, being predominantly the US and Europe.
This is something we are watching carefully and as a result we reduced our exposure to non-UK economic areas at the end of last year as we saw this potential in the short term. We are also aware that as Sterling rises so does the opportunity that Sterling will weaken and therefore give a boost to non-Sterling denominated assets. We are therefore observing this and will report further as we move through the economic cycle and forward guidance develops throughout the world.
For today though we are happy to remain underweight U.S. and Emerging markets, neutral Europe and overweight UK, especially as the UK is seen as the hot spot for growth.
One important point to note is that we have renamed our portfolios as follows:
Cautious Dynamic is now OCM OBI Focus 5%
Cautious Balanced Dynamic is now OCM OBI Focus 6.5%
Balanced Dynamic is now OCM OBI Focus 8%
Balanced Aggressive Dynamic is now OCM OBI Focus 10%
The reasoning behind this is so that there is greater clarity around what each portfolio is aiming to achieve and leaves no ambiguity around the name.
Past performance should not be used as a guide to future performance and performance of client portfolios will be different due to timing of switches and charge levied by OCM. All performance data is total return (income reinvested) and net of all fund managers charges.
Further Data on a changing Forward Guidance?
It was last August when Mark Carney initially introduced his forward guidance regime in an attempt to provide investors with a realistic expectation of policy changes. So what has happened since then?
The Bank of England’s Inflation report has shown that more upbeat data is coming out of the UK. The UK recovery has gained momentum and is continuing to do so, but admittedly by the Bank of England; the economy remains fragile.
The unemployment rate has risen from 7.1% to 7.2% which is just slightly over the previous threshold of 7% which was agreed by Carney in 2013. At that point unemployment was at 7.5% and there was lots of spare capacity and slack in the labour markets. What the Bank of England are effectively trying to do now is calculate how much of that slack is still in the labour markets by looking deeper at the underlying trends. To summarise these trends; the economy has seen growth across all sectors in the UK including retail, business services, construction, manufacturing and it is being driven by an increase in both consumer and business confidence.
Households are feeling less depressed as house prices have been trending upwards and since the end of 2011 the savings ratio has declined. What this means is that more people are spending, so in general all good news. However, for this to continue we need to see disposable income rising, which has not happened yet. This is one of the biggest factors that the Bank of England will need to comprehend before making any policy changes.