Fund Management Diary Meeting held on 19 th December 2017 Markets trump year of political uncertainty General elections, Brexit negotiations and the threat of international disputes dominated 2017 However, despite the turbulent political backdrop, global growth accelerated compared with 2016 Markets shrugged off political uncertainty and the start of monetary policy normalisation in the United States As we approach the end of 2017, now is a good time to take stock of the major global developments from the past twelve months. Three key points stand out: (i) the global economy has performed well despite political uncertainty; (ii) monetary policy normalisation began after a decade of ultra-loose policy; and (iii) financial markets took these developments in their stride. Brexit has dominated politics in the United Kingdom over the past twelve months. Negotiations with the European Union started after Article 50 was triggered in March. Shortly afterwards, the prime minister, Theresa May, called a snap election in a bid to boost her parliamentary majority. This tactic ultimately failed and the Conservative party had to strike a deal with the Democratic Unionist Party in Northern Ireland to ensure a working majority in parliament. The political power that this deal gave to the Northern Irish party threatened to prevent the British government from reaching an agreement with the European Union on the three key withdrawal issues. However, the European Union Council s recent decision to sign off sufficient progress in December opens the door to agreeing a transition period, which would see the United Kingdom remain in the customs union and single market until 2021, early next year. But determining post-transition arrangements is set to be far more fractious, with Parliament now due a vote on the terms of withdrawal and the Cabinet divided over what the Brexit end-state should be. Outside of the United Kingdom, there have been general elections in France, Germany, the Netherlands and an unofficial independence referendum in Catalonia. However, the threat of a populist taking power didn t ultimately materialise from any of these. The greatest contribution to global political uncertainty followed the inauguration of Donald Trump as President of the United States, who promised to shake-up the established order and usher in a wave of economic and foreign policy reforms. While Congress is now close to passing tax reform, which will provide a one-off boost to growth next year in return for increasing the budget deficit, progress on much of the President s policy agenda has been somewhat lacklustre. This lack of progress probably helps to explain the irony that the global trade recovery finally got going this year under the presidency of Donald Trump. Global trade volumes look set to grow by around 4.3 per cent in 2017, compared with an annual average of 3.1 per cent over the previous five years. But it has not all been good news for world trade since the United States elections at the end of last year with the fate of the North American Free Trade Agreement still in jeopardy. And geopolitical risks still remain following an escalation of tensions between the United States and North Korea.
Despite the high levels of political uncertainty, global growth looks set to increase from 2.7 per cent last year to 3.4 per cent this year. This has been broad based, with growth in most advanced economies (for example the United States, euro-zone and Japan) accelerating. And despite the predictions of some forecasters, the British economy has continued to hold up as Brexit nears. Economic growth is set to be 1.6 per cent in 2017 a touch below last year s 1.8 per cent. Emerging markets have also played a part in the acceleration of the global economy in 2017. Growth across emerging markets is set to average 4.7 per cent, compared with 4.0 per cent last year. China, India and South Korea all contributed to this improved performance. Meanwhile, Brazil and Russia are set to post positive growth after two years of recession. One of the major policy milestones of the year was the Federal Reserve s decision to begin scaling back its balance sheet in September, nearly eight years after it started quantitative easing. It came after the four major central banks in the developed world had collectively purchased around $10.6 trillion of assets since 2008 equivalent to around nine per cent of global gross domestic product. This massive volume of central bank purchases since the financial crisis has helped to supress bond yields, boost equity prices and, in some cases, cause sharp exchange rate movements. Although no other central bank was prepared to announce a reversal of quantitative easing in 2017, the Bank of England did raise interest rates for the first time in a decade in November. Meanwhile, the European Central Bank announced that it would start reducing the pace of its asset purchases in 2018. These moves, along with three rate hikes by the Federal Reserve in 2017, herald the start of a gradual return to an era of conventional monetary policy and higher interest rates. Tighter monetary policy and rising interest rate expectations have helped to push ten-year bond yields in the United States up from around 2.0 per cent in September to 2.4 per cent today. But despite rising interest rates and elevated political uncertainty this year, equity markets have made decent gains across the world. At the time of writing, the S&P 500 had gained nineteen per cent since the start of the year, the DAX fourteen per cent and the FTSE 100 five per cent. It is tempting to attribute the surge in the S&P 500 since the United States elections last November to the prospect of tax reform. But this does not appear to have been the main factor. The performance of different sectors suggests that something else has provided more of the fuel for its rally over the past year. This is likely to have been greater optimism about the outlook for earnings before tax, in light of the health of the economy in the United States and elsewhere. This view is corroborated by the fact that cyclical sectors, especially information technology, have generally performed the best across the world, while defensive sectors have fared worse. Overall, although politics threatened to destabilise markets in 2017, a healthy global economy has enabled equity markets to have their strongest year since 2013. *This diary has been written in conjunction with Capital Economics.
Strategy The year has ended with the global economy being in overall good health. The Margetts investment committee have a positive outlook for 2018 and feel that markets are generally likely to achieve positive returns. Nominal growth has been increasing and the investment committee expect this to continue during 2018, driven by inflation. Increasing nominal growth is positive for company valuations and subsequently stock market growth. The investment committee believe that the challenge for 2018 will be to avoid bubbles that have the potential to reverse during the year. The committee believe that it will be hard to predict the timing of reversals and favour value orientated strategies over growth. Growth strategies tend to be driven by more cyclical themes, which can change quickly and significantly, whereas value strategies are believed to be more reliable and tend not to be driven by short term trends.
Fund Comments The below charts show the current positions of the fund, the tactical (short term) targets, and the strategic (long term) targets of the fund. We aim to keep the current positions in line with the tactical targets from week to week. The differences between the tactical and strategic targets reflect the views and convictions of the Margetts Investment Committee. Providence 60.0% Current Position Tactical Targets Strategic Targets 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Asset Allocation: The above chart, as of 15/12/2017, demonstrates the fund s current asset allocation is close to the targets set by the committee, and no changes to the tactical targets or to asset allocation are being made this week. Fund Selection: We continue to sell the Smith & Williamson Short Dated Corporate Bond fund, and invest into the L&G Short Dated Sterling Corporate Bond fund instead. The Royal London Global Index Linked fund has been the strongest performing bond holding in the portfolio this week, while the Threadneedle UK Equity Income fund has lagged the sector over recent weeks.
Select 50.0% Current Position Tactical Targets Strategic Targets 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Asset Allocation: The above chart, as of 15/12/2017, demonstrates the fund s current asset allocation is close to the targets set by the committee, and no changes to the tactical targets or to asset allocation are being made this week. Fund Selection: The team continue to monitor the Rathbone Income fund. The Schroder Asian Income fund has shown strong short term performance, while the SVM UK Growth fund has underperformed the IA UK All Companies sector over 1 month. We are comfortable with this holding and its long term performance remains strong.
International 60.0% Current Position Tactical Targets Strategic Targets 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Asset Allocation: The above chart, as of 15/12/2017, demonstrates the fund s current asset allocation is close to the targets set by the committee, and no changes to the tactical targets or to asset allocation are being made this week. Fund Selection: The team are still closely observing the Majedie UK Equity fund. The L&G Asian Income fund has shown strong performance over 4 weeks, while the Threadneedle UK Growth and Income fund has been somewhat weaker.
Venture 40.0% Current Position Tactical Targets Strategic Targets 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Asset Allocation: The above chart, as of 15/12/2017, demonstrates the fund s current asset allocation is close to the targets set by the committee, and no changes to the tactical targets or to asset allocation are being made this week. Fund Selection: The IP Asian and M&G Global Dividend funds have been strong performers over 12 weeks, while the Fidelity Institutional South East Asia fund has marginally lagged the IA Asia Pacific ex Japan sector over 3 months.
Important Information Please note that the contents are based on the author s opinion and are not intended as investment advice. This information is aimed at professional advisers and should not be relied upon by any other persons. Any research is for information only, does not constitute financial advice or necessarily reflect the views of the author and is subject to change. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the fund is suitable and appropriate for their customer. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested. Important information about the funds can be found in the Supplementary Information Document and NURS-KII Document which are available on our website or on request. Issued by Margetts Fund Management Ltd Margetts Fund Management Limited is authorised and regulated by the Financial Conduct Authority For any information about the company or for a copy of the company's Terms of Business, please contact the company on 0121 236 2380 or at 1 Sovereign Court, Graham Street, Birmingham B1 3JR You can e-mail us at admin@margetts.com