tilneybestinvest.co.uk 020 7189 2400 info@tilneybestinvest.co.uk Market & Economic Update MARKET COMMENTARY Gareth Lewis CHIEF INVESTMENT OFFICER Louie French RESEARCH ANALYST Chart of the Month After highlighting the increased volatility of the Chinese stock market in last month s chart of the month, this month we have highlighted the closely linked fall in commodity prices. Unlucky for some, number 13 was certainly the case for commodity markets in July, as the headline indices fell to 13-year lows. A combination of falling global demand, particularly from China and the emerging markets, a strong US dollar linked to expectations of a rate rise in the near future, and the well-publicised fall in oil prices have all contributed to the dramatic fall in commodity markets over the last year. The month saw a marked divergence in performance between developed and emerging market equities. Whilst the former responded positively to signs of a resolution to the Greek crisis, emerging markets were weighed down by mixed economic reports and continued volatility in local Chinese equity markets. The commodity sector, led by oil, was particularly weak given concerns over the ongoing Chinese economic slowdown and excess production. Quality corporate and government bond indices ended the month firmer, whilst global high yield bond indices recorded small losses on account of their exposure to the oil and mining sectors. In the US comments from the Federal Reserve (the Fed) did little to change expectations that the first rate hike a five-year low of US$1091/oz in July on the back of continued US dollar strength and lower-than-expected gold reserve data out of China. Additionally, a general oversupply in a number of commodity sub-sectors, as demand has slowed and the commodity super cycle has ended, 500 450 400 will come in September or December, with steady momentum in GDP growth driven by a pick-up in consumer spending and strengthening labour and housing markets. In Europe, data from the European Central Bank s (ECB) latest lending survey pointed to improving access to and demand for credit, suggesting the region s modest recovery remains on track. In contrast, a key economic signal for China indicated renewed weakness in the economy, reinforcing the five-year underperformance of emerging market equities. With the fall in Chinese equities, which started in June, continuing into July, the Chinese authorities imposed a number of restrictions on stock market participants in an effort to stem further falls in equity prices. has seen prices fall agriculture, industrial metals and livestock have all posted double-digit losses on a total return basis since October 2014. With supply continuing to outweigh demand in a large number of individual commodity markets, the outlook for the sector remains subdued. 1200 0 In anticipation of this poor performance we zero weighted commodities from our asset allocation models in October last year. Since then the Bloomberg Commodity index has fallen by -22% and the S&P GSCI Commodity index by -34% on a total return basis. Key drivers of this poor performance have been the fall in oil prices down more than 50% year on year with West Texas Intermediate Crude Oil suffering its largest monthly percentage decline since October 2008 in July and gold falling to Index Level 350 300 6000 250 200 4000 150 2000 2002 2004 2006 2008 2010 2012 2014 Year Bloomberg- Commodity Total Return (LH scale) S&P GSCI Commodity Total Return (RH Scale) Source: Thomson Reuters Datastream / Tilney bestinvest 8000 Index Level
Our view asset allocation summary GENERAL SUMMARY Major developed-market Central banks have added more than US$7 trillion in liquidity since 2007 to the global economy to try to stave off the worst effects of the banking crisis. This stimulus may have helped to prevent a severe downturn in activity, but it has also prevented a normal default cycle and has contributed to a potential state of secular stagnation of low growth and low inflation. Now that the US Federal Reserve has ended its asset-purchase programme, the flow of liquidity is likely to reduce, though the pace of reduction will probably be pacified by the stimulative policies being pursued within the Eurozone as well as Japan. The recent increase in bond and currency market volatility highlights investor uncertainty over how these two forces will play out. EQUITIES The asset allocation committee reduced the weighting to UK equities by 1% in July, adding the 1% to hedge. Overall we are neutral on UK equities, but the committee has marginally reduced risk further across portfolios. Geographically, we remain underweight Asia Pacific, Emerging Markets and North America, and overweight Europe and Japan. Most equity markets now look fair value relative to their own histories, following the prolonged rally in prices. The US is almost certainly the outlier, as the combination of debt refinancing and aggressive share buybacks have driven corporate margins to record highs. In contrast, the more subdued levels of economic activity are reflected by realistic Eurozone equity valuations. However, as ECB QE increases liquidity flows and pushes down the currency, the region s equity markets are expected to benefit as investors appraise prospects. Japanese equities continue to look good value as rising corporate earnings and strong investor flows sustain prices. We are cognisant that investment in the UK market exposes performance to commodity prices from the large-cap mining stocks based here, but believe that much of the concern is already in the price. The UK market also offers income in this low-growth, low-inflation environment. There is a performance differential between Emerging Markets and Asia Pacific, with the former more closely correlated to commodity prices. There is also a dispersion between country and region in terms of valuation and returns, with many Asia Pacific currencies pegged to the US dollar, and competitiveness being eroded in the face of Japan devaluating its currency. FIXED INCOME There were no changes by the asset allocation committee to fixed income in July s meeting we remain underweight the asset class following the 3% reduction in our core reference model at May s meeting. The lack of liquidity in the high yield market remains a particular concern. As expected Eurozone bond markets have responded to the ECB asset-purchase programme by selling off following a short lag. QE is an inherently pro-growth and pro-inflation policy, which does not sit easily with the low yields on offer across Europe during Q1; this highlighted the deteriorating conditions for all world bond markets, with falling prices rapidly transmitting elsewhere, despite more rational valuations. Many of the Emerging Market countries are commodity-dependent, and hard-currency debt is a concern across sovereign corporate and bank debt; the continued strength of the US dollar is seen as a negative for these countries. There is a lack of liquidity in this market, which is highlighted during risk-off periods. ALTERNATIVES Commercial property prices remain well below their 2007 highs, and IPD (Investment Property Databank) forecasts are positive. The UK economy is relatively strong and property returns are believed to be more attractive. We are overweight UK commercial property. We believe the commodities asset class remains relatively unappealing, even more so due to US dollar strength and the slowdown in demand. The asset allocation committee maintained the zero weighting to this asset class. 2 Market & Economic Update
NORTH AMERICA, UK AND WESTERN EUROPE After a poor month for developed DEVELOPED MARKETS, PERCENTAGE GROWTH, TOTAL RETURN equity markets in June, July was a 114 strong month for equity returns overall as investor confidence in 112 markets bounced back. The FTSE 110 TR was up 2.8%, the FTSE World Europe ex UK TR was up 4.4% and the 108 S&P 500 TR was up 2.9% in sterling 106 terms over the month. European 104 equities were also the standout performer in local currency terms, 102 with the FTSE World Europe ex UK TR rising 4.5%, whilst the S&P 500 TR was up 2.1% reflecting a stronger month 98 for the US dollar. 96 3 However, the headline numbers did hide significant underperformance in certain sectors of the market. In particular, the continued fall in commodity prices were again a drag on key large-cap sub-sectors such as mining, which was down -10.2% on a total-return basis over the month. This poor performance was offset by positive contributions from a number of sectors, particularly the defensive sectors such as Health Care and Consumer Goods, which were the standout performers in July, returning 7.7% and 5.9% on a total return basis. In the US, the latest economic data released in July signalled an improvement in the world s largest economy after a weaker start to 2015. Firstly, second quarter GDP growth was 2.3% annualised, driven by a pick-up in consumer spending. Housing starts and building permits for June were also strong and ahead of expectations, with housing starts up 9.8% month on month and building permits up 7.4% month on month. On the labour front the US jobs market continued to strengthen, as June saw a further 223,000 jobs created. Lastly, the latest comments from the Federal Open Market Committee (FOMC) did little to change expectations that the first rate hike will come in September or December this year. Meanwhile, in the UK preliminary estimates of second quarter GDP growth accelerated to 0.7% as expected, with the services sector a key driver in the performance. Negatives in the GDP data included construction, which was estimated to have been flat over the quarter, and manufacturing, which contracted by 94 FTSE TR S&P 500 TR FTSE World Europe ex UK TR -0.3%. Overall the UK GDP picture points to solid but unbalanced growth in the UK economy. In the labour market the unemployment rate ticked up by 0.1% to 5.6% in June, a signal that job creation may be slowing. However, wages were up by 3.2% in the three months to May, signalling a tightening of the labour market. Combined with a low-inflation environment, 0% year on year in June, it is unsurprising that consumer spending has continued to grow. UK retail sales data for June released in July were down slightly from May, but are still up 3.9% year on year. Lastly, members of the Bank of England s Monetary Policy Committee voted unanimously to keep the bank rate on hold at 0.5%. However, with the minutes from the meeting pointing towards what could be considered more hawkish rhetoric, all eyes will be on its next meeting. In Europe, the ongoing stand-off between the ruling Syriza party and Greece s creditors finally showed signs of moving towards a resolution as terms and conditions of its bailout were finally agreed. However, with hostilities and the colossal underlying debt problems likely to flare up again in the near future, investors in the Athens stock exchange are set for a bumpy ride when it re-opens after a five-week closure at the start of August. Elsewhere in Europe, the ECB s latest lending survey pointed to improving access to, and demand for, credit. This suggests the region s modest recovery remains on track. A combination of low inflation, 0.2% year on year in June, and a weaker euro linked to the ECB s quantitative easing programme has evidently improved confidence and provided a boost to the bloc s fortunes. Flash PMI (Purchasing Managers Index) readings for July continued to show momentum for business confidence, particularly outside the core economies of Germany and France. The composite PMI for July, which combines the manufacturing and services sectors and is normally a signal of growth, remained in strong expansionary territory with a reading of 53.7. Lastly, with inflation still well below the ECB s 2% target and the overall unemployment rate for the region remaining high at 11.1%, it is unsurprising to hear ECB President Mario Draghi commit to continued asset purchases of 60 billion per month, with the option to increase the stimulus measures if warranted. DEVELOPED EQUITY MARKET VALUATIONS: S&P 500 PE: 20.0x, Yield: 2.1% FTSE All Share PE: 15.5x, Yield: 3.4% *DataStream Total European Market PE: 17.8x, Yield: 3.0% *Includes the UK.
ASIA, JAPAN AND THE EMERGING MARKETS Both Asia Pacific and Emerging Market equities produced negative returns for investors in July. The MSCI AC Asia Pacific ex Japan TR and MSCI Emerging Markets TR were down -4.2% and -6.1% respectively in sterling terms over the month and -5.0% and -6.9% in local currency terms. Notably in the emerging markets Brazilian equities continued to be volatile in July, falling -4% over the month as economic concerns in the large South American country deepened. In Asia much of this underperformance was driven by the continued volatility of the Chinese stock market and the impact that this has on neighbouring economies and investors appetite for the region overall. Last month we highlighted how the Chinese authorities were intervening in markets to try and stop them from falling further, and how margin lending had been a key driver in the performance of the Shanghai composite. July witnessed increased attempts by the authorities to stop the slump, with the People s Bank of China (PBoC) providing liquidity support for markets, whilst domestic brokerages were encouraged to invest in a stock market stabilisation fund. In addition, shares in a large number of companies were suspended from trading and a number of IPOs were halted. However, these interventions failed to prevent further volatility and the Shanghai composite from falling. Overall the index was down -13.8% in local currency terms over the month, whilst Hong Kong s Hang Seng index fell -5.4%. The increased volatility in the Chinese stock market was highlighted on 27 July when markets fell -8.5% in a day. On the economic front the latest official Q2 GDP data was suspiciously on target at 7% year-on-year growth. Data released in the month continued ASIAN & EMERGING MARKETS, PERCENTAGE GROWTH, TOTAL RETURN 125 120 115 110 105 95 90 MSCI AC Asia Pacific ex Japan TR Topix TR MSCI Emerging Markets TR to suggest that the official numbers were not reflective of the slowdown in China s economy. Firstly, the latest flash manufacturing PMI for July dropped to a 13-month low of 48.2, the fifth month in a row of contraction. This was supported by the MNI China Business indicator for business sentiment, which was down to 48.8 in July, matching the lowest year-to-date level. Additionally, total exports were down -8.4% year on year in July, whilst producer prices continued their contraction, falling -4.8% year on year. However, there were some positive data out of China in June as industrial output rose moderately to 6.8% year on year, retail sales rose to 10.6% year on year, and CPI inflation ticked up to 1.4% year on year. Meanwhile, Japanese equities which have been the standout performer so far this year, recovered some of June s losses with the Topix TR rising 1.3% in sterling terms and 1.8% in local currency terms over the month. Consumer staples were notably firm as the Topix recovered from a poor start to July. On the economic front the latest data out of Japan continued to highlight the impact of a weaker yen on certain parts of the economy. Exports were up 9.5% year on year in June, with a 5.9% year on year increase in exports to China driven by electronics and plastics. The weakness of the yen has also helped business confidence, with the latest Tankan business survey signalling improved confidence across business sectors. Machine orders have hit a seven-year high, the manufacturing PMI was up to 51.4, and the unemployment rate remains at its lowest level since April 1997. However, the latest Bank of Japan meeting minutes highlighted concerns over whether the stimulus measures are having the desired effect, as consumption, wage growth and deflationary expectations remain a challenge. The latest CPI inflation figure for June was only 0.4% year on year. Topix PE: 19.8x, Yield: 1.6%
FIXED INCOME July was a stronger month for bond markets generally, with the BofA Merrill Lynch Sterling Corporate Bond TR index up 1.7%, whilst the BofA Merrill Lynch Global High Yield TR index returned 0.3% in sterling terms, but was down -0.4% in US dollar terms. US high yield with its exposure to oil and mining was a notable underperformer over the month, whilst diminishing concerns over the Greek debt crisis boosted corporate and government bonds after a volatile month in June. FIXED INTEREST MARKETS, PERCENTAGE GROWTH 106 104 102 98 96 94 BofA Merrill Lynch Global High Yield TR BofA Merrill Lynch Sterling Corporate Bond TR Government bond yields were down over the month, with the UK 10-year gilt yield and German 10-year bunds falling more than 20bps to 1.9% and 0.6% respectively. US treasuries experienced similar movements to their European counterparts in July, with US 10-year yields finishing the month at 2.18%. CURRENCIES After a strong month in June, sterling was up moderately again in July versus the euro and the Japanese yen, with both currencies falling -0.1% and -0.5% in sterling terms respectively. However, July was a stronger month for the US dollar, as stronger economic data saw expectations of a rate rise pick up again. The dollar was up 0.8% versus sterling, up 0.9% versus the euro and up 1.2% versus the Japanese yen. CURRENCY RETURNS RELATIVE TO GBP, PERCENTAGE GROWTH 106 104 102 98 96 94 92 90 Lastly, the Russian rouble was down again in July versus the US dollar, falling -8.0% over the month. Euro Japanese yen US dollar 5 Market & Economic Update
COMMODITIES July was a poor month for commodity markets as highlighted earlier in the chart of the month section. The two headline indices, the Bloomberg Commodity index TR and the S&P GSCI index TR, were both down over the month, falling -10.6% and -14.1% respectively in US dollar terms. Contributions to this poor performance were seen across commodity markets, with all the S&P GSCI sub-sectors producing negative returns. The S&P GSCI Energy subsector was the worst performing in July falling -17.2%, whilst the S&P GSCI Agriculture sub-sector gave back most of June s gains by falling -12.4% over the month. The S&P GSCI Livestock, Precious Metals and Industrial Metals were also down -5.2%, -6.4% and -6.7% respectively. Unsurprisingly the performance of the individual commodity indices in July didn t make comfortable reading either. The only individual index to produce positive returns in July was Lean Hogs, which was up marginally by 0.5%. Meanwhile, after a positive month in June as a result of heavy rains in the US mid-west and concerns over grains, Wheat and Corn were amongst the worst performing in July, falling -18.9% and -12.1% respectively. Lastly, individual oil commodity indices continued to perform poorly in July, with Crude Oil falling by -21.5% and Brent Crude by -18.2%. The prospect of increased oil output from Iran following the removal of its sanctions and a moderate pick-up in US rig counts both added to downward pressure on oil prices. COMMODITIES PERFORMANCE 1 st - 31 th JULY 2015 Index Total Return Level % Change Lean Hogs Cocoa Feeder Cattle Lead Live Cattle Zinc Natural Gas Aluminum Silver Coffee Cotton Gold Nickel Platinum Soybeans Copper Unleaded Gas Bloomberg Commodity Index Sugar Corn Gas Oil S&P GSCI Heating Oil Brent Crude Wheat Kansas Wheat -25 Crude Oil -20-15 -10-5 0 Commodity monthly performance, July 2015. Indices highlighted in yellow. Data in the above table in US dollars. 6 Market & Economic Update
HEDGE FUNDS July was a mixed month for the HFRX sub-indices, with returns ranging from 2.3% to -1.7% in US dollar terms, and 3.1% to -1.0% in sterling terms, reflecting a stronger month for the US dollar. The worst-performing sub-index in the month was the HFRX Event Driven returning -1.7% in US dollar terms and -1.0% in sterling terms. HEDGE FUND RETURNS, TOTAL RETURN 103.5 103.0 102.5 102.0 101.5 101.0.5 Market & Economic Update The best-performing sub-index in June was the HFRX Macro/CTA, which returned 2.3% in US dollar terms and 3.1% in sterling terms..0 99.5 HFRX Global Hedge Fund GBP The headline index, the HFRX Global Hedge Fund, returned -0.8% in US dollar terms and 0% in sterling terms over the month. PROPERTY The IPD UK Property Monthly Total Return index increased by 1.4% in June, compared to 1.2% in the previous month. Whilst income returns remained stable at 0.5%, capital returns were up from the 0.7% in May, to 0.9% in June. The Office and Industrial sectors were once again the best performing in June, both increasing by 1.8% on a total return basis over the month, whilst the Retail sector produced a total return of 0.8%. Overall in the first half of 2015 the IPD UK Property Monthly Total Return index returned 6.8% on a total return basis, which is on target for the low double-digit returns forecast for 2015. MONTHLY IPD RETURNS* 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 June 15 Income return Capital growth *Index data is released mid-month and therefore figures are only available with a one month lag. 7 Market & Economic Update
DATASHEET LATEST MARKET RETURNS TO THE 31 JULY 2015 PERCENTAGE RETURNS FOR MAJOR ASSET CLASS INDICES. Market 1m 3m 6m 2014-15 2013-14 2012-13 2011-12 2010-11 3 Year 5 Year S&P 500 TR 2.9-0.1 2.5 20.3 5.0 29.2 14.3 14.2 63.2 113.0 FTSE All-Share TR 2.4-2.2 2.8 5.4 5.6 24.3 0.4 14.9 38.3 59.6 FTSE TR 2.8-3.1 1.2 3.1 5.3 22.0 0.7 14.2 32.4 52.1 FTSE World Europe ex UK TR 4.4-1.7 4.3 9.6 4.1 36.0-12.8 12.6 55.3 52.5 EURO STOXX 50 TR 5.2-1.5 3.7 6.8 5.6 38.0-17.5 7.1 55.6 37.4 Topix TR 1.3-0.7 8.1 17.7-0.2 29.0-7.2 8.4 51.6 52.5 MSCI AC Asia Pacific ex Japan TR -4.2-12.4-6.7-1.2 7.3 11.4-5.2 15.7 18.1 29.6 MSCI Emerging Markets TR -6.1-14.2-8.1-5.9 3.9 5.7-9.5 12.4 3.3 5.1 Numis Smaller Companies (Ex-IT) TR 1.5 4.3 12.9 13.3 10.2 40.4-1.4 24.2 75.3 114.8 BofA Merrill Lynch Global High Yield TR 0.3-3.0-1.5 4.9-1.6 15.6 10.1 8.6 19.4 42.7 BofA Merrill Lynch Sterling Corporate Bond TR 1.7-0.7-4.0 7.6 5.9 5.6 11.2 7.6 20.3 44.0 Markit iboxx Sterling Corporates TR 1.8-0.7-4.0 7.5 5.8 6.2 10.1 7.0 20.8 42.4 FTSE British Government All Stocks TR 1.6 0.2-4.1 9.5 2.6-3.6 14.6 6.7 8.3 32.4 HFRX Global Hedge Fund GBP 0.0-1.0 1.5-0.2 3.4 6.1-4.9 3.0 9.6 7.4 Euromoney Global Mining TR -13.1-25.3-21.0-37.2 8.0-15.0-29.5 25.0-42.3-49.2 Bloomberg Commodity TR -9.9-12.9-12.4-22.4-8.9-9.5-7.2 15.8-36.0-31.2 S&P GSCI TR -13.4-17.2-10.8-38.0-10.5 4.0-2.9 16.7-42.3-34.6 Gold Index -5.8-9.4-16.6-8.1-12.0-16.2 4.3 32.9-32.3-6.1 FTSE WMA Stock Market Balanced TR 1.6-1.7 1.0 8.2 4.7 16.6 3.7 11.7 32.2 53.0 FTSE WMA Stock Market Growth TR 1.7-2.0 1.7 8.3 4.7 20.1 1.8 12.7 36.2 56.3 FTSE WMA Stock Market Income TR 1.5-1.4 0.1 7.9 4.4 11.9 5.7 10.8 26.1 47.6 LIBOR GBP 3 Month 0.0 0.1 0.3 0.6 0.5 0.6 1.0 0.8 1.7 3.5 US Dollar 0.8-1.5-3.8 8.2-10.2 3.3 4.8-4.6 0.4 0.4 Japanese Yen -0.5-4.9-8.8-10.2-14.1-17.9 3.5 7.1-36.7-29.8 Euro -0.1-2.9-5.8-10.7-9.5 11.4-10.2 5.2-9.9-14.9 8 1 Year ending 31 July. Source: Lipper (to 31 July 2015 in GBP. Currency movements are vs. sterling.)
IMPORTANT INFORMATION The value of your investments, and the income derived from them, can go down as well as up, and you can get back less than you originally invested. Any indication of past performance or quoted yields is not an indicator of future returns. Before investing in funds, please check the specific risk factors on the key features document or refer to our risk warning notice, as some funds can be highrisk or complex, or can be susceptible to risks particular to the geographical area or industry sector in which they invest. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change. Any research or analysis contained in this document has been undertaken by us for our own use and may be acted on in that connection. The contents of the document are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. The document may include forward-looking statements which are based on our current opinions, expectations and projections. It is provided to you only incidentally, and should not be considered a personal recommendation or advice to invest. Any opinions expressed are subject to change without notice. 130815-1530 9 Market & Economic Update