VIEWS FROM THE DESK 5 th April 2012

Transcription

1 VIEWS FROM THE DESK 5 th April 2012 Wow what a quarter! In terms of equities, the S&P 500 was up 12.6%, representing the strongest opening quarter since In Japan, the Nikkei 225 (20.3%) has delivered its best opening quarter since Double digit year-to-date returns have been captured by investors in the NASDAQ, the Dax 30, the Bovespa and the Indian BSE. The FTSE 100 has been a laggard (4.8%), as has China (3%) and Spanish equities were down 5.9%. Turning to bonds, European high yield (HY) was a star performer, up 12%, UK and US investment grade delivered 4% and 2.8%. Government debt markets were mixed with US Treasuries down 1.3% and UK Gilts down 1.8%. By way of contrast, Italian BTPs were up 11.1%. Within the Commodity cluster, Gold was up 6.7%, Silver 15.9%, Copper 11.3% and Brent Oil 15.6%. Q1 performance The performance of Affinity s discretionary investment management strategies over the first quarter are summarised in the table below and in the charts at the end of this article. The performance detailed above is for illustrative purposes only and reflects the returns across Affinity Private Wealth s Income, Real Return and Growth model strategies, net of 0.95% management fees. This does not constitute investment advice and past performance should not be viewed as an indicator of future performance. Moving into Q2, what are we thinking about as we manage our client s assets? Equity bull markets are built around 3 pillars; growth, liquidity and attractive valuations. Global growth estimates have been ticking up, driven by positive economic data from the US. This said, the most recent dataflow has been mixed and the unseasonably warm weather may have brought-forward consumption, with US households enjoying a $40 billion warm weather dividend. Consequently, Q2 economic releases may disappoint. Some analysts have also started to express fears the Chinese economy is slowing sharply. However, slower growth is what the authorities want and let s not forget China has plenty of money in the bank to arrest the slowdown if it goes too far.

2 The second pillar liquidity is being closely monitored by central banks who have an established track record of throwing money at the problem should stresses emerge. There is no reason to think this approach is about to change notwithstanding the fact no-one really knows how things will eventually unwind - and the benefits of this warm bath (or promise of more) will be with us for a while longer. Market sentiment around growth and liquidity manifests itself in the US Treasury 10-year bond yield. Each time yields have risen they have quickly fallen again. Despite their expensive nature, we are not in the camp arguing G3 government bond yields are about to spike higher. Fear and greed drive markets and the former emotion currently holds sway, particularly in the minds of retail investors. Retail funds flow data provides strong evidence investors have been taking advantage of the strong rise in equity markets to sell holdings and switch into income generating assets with investment grade and high yield bond funds benefiting from this asset allocation shift. Underpinning this is a strong secular trend as baby-boomers hunt for yield and the Affinity strategies are positioned for this. The final pillar is valuation. Forward price/earnings charts for the major markets are all running below their historic median. Nevertheless, margins are at or near record highs, and with the continuing headwinds around sub-trend economic growth, deleveraging, a potential oil-price shock and the on-going European sovereign debt problems, valuations are probably at or around fair value. We have noted, however, that Growth Markets are trading at a discount to Developed Markets and long term investors should be rewarded, on a relative basis, by committing to the former. What will we be keeping an eye on over the next quarter? Politics: 2012 is an important year politically and we are following events in France closely, as they will have an important impact on the Franco-German relationship and the on-going Eurozone debt problem/resolution. Staying in Europe, Super Mario Monti is now being described as the regions most important political leader. Can he achieve the reforms Italy so desperately needs? Will the coalition hang together? Italian government bond yields will offer us the market s current perspective on these questions. Spanish government bond yields must be monitored closely too the recent violent demonstrations in Madrid and Barcelona were an indicator the people s appetite for austerity was starting to wane. We discussed our relatively sanguine view on growth in China; however, we are aware of pockets of social unrest across the country and whilst news flow is not always reliable, political instability is a tail-risk event we need to be mindful of. The authorities are aware of the growing gulf between the haves and the have nots and the risks this could create to socialist China s long term prosperity. Q2 earnings: Earnings expectations have been lowered and the market will be sensitive to the numbers published. US economic data: The robustness of the US recovery is a key factor for us. Jobs data, manufacturing data, consumer confidence, retail sales, credit demand and housing data

3 have all improved. Despite this, real income growth is weak, productivity gains muted, unemployment rates remain unacceptably high (particularly in terms of the long-term unemployed) and mortgage interest rates are rising at just the wrong time. This is not encouraging for an economy with; (i) 3 years of zero interest rates, (ii) a central bank with a balance sheet that has tripled in size and (iii) 4 years of trillion dollar plus deficits. US food stamp enrolment is rising at over 400,000 a month; with 15% of the US population using food stamps, up from 9% 3 years ago. Until recently markets have been priced for good news and less good news will be seen as a negative. There are, however, challenges in translating how markets will react to news flow. For example, significantly weaker economic numbers might increase the possibility of QE3 and the potential for a further liquidity fuelled rally for risk assets. Interpreting the current environment for risk assets is challenging and sifting through the noise to focus on the key data is an imperative. On balance, we believe investing in the debt and equity of high quality companies is a sensible strategy and growth markets continue to offer attractive opportunities for the long term investor. The secular trend to secure income at a reasonable price is underpinning flows into high yield where investors are content to clip coupons. To conclude and, importantly, ignoring the noise it is vital we retain our focus on the predictability and long-term influence our super secular and secular themes will have on asset prices. A decade ago the US accounted for just under one third of the global economy, today it accounts for less than a quarter and, unless China, India, Brazil and Indonesia grind to a halt, this will drop to one sixth by There are 3 key here to stay demographic trends the world s population is getting bigger, wealthier and older For Affinity, this means we should be allocating investment capital recognising; (i) the rising demand for natural resources, (ii) the emergence of new middle classes, (iii) changes in consumption patterns, (iv) ageing populations and rising dependency ratio It will, of course, be important we do not overpay when accessing these long-term themes, either by way of equity or debt markets. We will therefore adhere to our core principle and acknowledge the price we pay will be an important determinant of future returns. Continued overleaf

4 Q1 Performance Charts Income Strategy Cumulative Performance vs. Benchmarks Q Real Return Strategy - Cumulative Performance vs. Benchmarks Q1 2012

5 Growth Strategy - Cumulative Performance vs. Benchmarks Q The performance detailed above is for illustrative purposes only and reflects the returns across Affinity Private Wealth s Income, Real Return and Growth model strategies, net of 0.95% management fees. This does not constitute investment advice and past performance should not be viewed as an indicator of future performance. Affinity Private Wealth is a trading name for APW Investors Limited, which is regulated by the Jersey Financial Services Commission. Registered office 24 Seale Street, St Helier, Jersey JE2 3QG.