1 INVESTMENT UPDATE July 2018 PERFORMANCE UPDATE ASSET CLASS REVIEW THE STOCK MARKET WORLD CUP WHAT RISK ARE YOU TAKING WITH YOUR MONEY? FINAL COMMENT PERFORMANCE UPDATE Most asset classes suffered small losses in June with the FTSE 100, Gold, UK Gilts and Corporate Bonds all falling in value. Our portfolios fell by between 0.30% and 0.60%, giving up some of the previous months strong gains. After a calm 2017, all markets are displaying much more volatility, with daily swings of +/-1% occurring more regularly. A strong US Dollar and fears that the trade war will escalate, has caused some Emerging Markets to fall significantly. European Equities, in particular exporting German companies, have fallen more than most due to concerns over trade wars with the US. The Bank of England left rates unchanged last week, as many expected. However, what came as a shock was the vote outcome. A 7-2 split was predicted but the vote ended 6-3. Following the vote, the Pound shot up against major peers and traders started betting, once more, on a rate hike in August. Stock markets appear to have paused after recovering from their March lows this is normal after such a sharp and quick fall. The performance of the portfolios over the last month and year is shown below: Portfolio Performance % 1 month Performance % 1 year Foundation -0.30-0.12 Cautious -0.31 0.33 Balanced -0.45 1.00 Adventurous -0.60 1.83 Dynamic Equity -0.48 5.91 Please note that these figures do not include the platform s, or our fees.
Summary of Portfolios Investors tend to have an optimistic or pessimistic view of stock markets. The optimistic investor expects markets to go up significantly over the long term and buy more. The pessimistic investor believes that in the short term all the bad news around will potentially cause the next crash and they take money out of the markets. When the number of optimistic and pessimistic investors are in equilibrium then stock markets tend to range before one of the views gathers momentum. The stock market then either breaks upwards or downwards. We currently appear to be in the ranging period in which optimism is being balanced by pessimism. The Glass Half Full Story (Optimistic) We are living through one of the most exciting economic periods of our lifetimes. Technology is growing exponentially and providing us with more investment opportunities than ever before. We are experiencing emerging technology breakthroughs in a number of fields, including robotics, artificial intelligence, blockchain, nanotechnology, quantum computing, biotechnology, the Internet of Things, 3-D printing, and autonomous vehicles. Companies at the forefront of this technology have seen their share prices rise significantly, and the old traditional companies that have embraced the change have also been successful. In addition, we are in the Goldilocks stage of the economic cycle in which we are experiencing low unemployment, low interest rates, low inflation and steady economic growth. The charts in the next section all show that there are no signs of this ending in the short term. In the UK we have seen billions of pounds transfer out of final salary pension schemes into personal pensions, with a view to the pension holder taking a higher income and at an earlier age than if they were left in the old pension schemes. This will boost the UK economy over the next few years as more money circulates around. The Glass Half Empty Story (Pessimistic) The biggest concerns for the pessimists are currently Trump and Brexit. Trump could singlehandedly start a trade war in which there will be no winners. Last month the German and emerging countries stock markets fell significantly due to fears that their exporting companies will be hit the hardest, and if the trade war escalates this could be the catalyst for the next global recession. In addition, Brexit adds a layer of uncertainty which could cause the UK to go into recession. The Glass Is Neither Half Full Nor Half Empty Our Portfolios The FTSE 100 fell from a high of 7,778 on the 12 th January, to 6,888 on the 26 th March, but then recovered to 7,877 on the 22 nd May. It has subsequently fallen, and we are now at the same level we saw last summer. In Europe they never saw the same recovery and stock markets are generally lower than they were in the previous year. In the US, markets are higher, but this is solely down to the outperformance of their technology companies. We are therefore clearly in a ranging period for most markets and wait for the pessimistic or optimistic views to win. Our portfolios reduced the amount invested in equities during the difficult times earlier this year due to the fact that most markets had broken below trend. Pessimistic views were beginning to win but then we experienced a sudden change and we invested more money back into the markets as some markets moved back into upward trends. At this stage we are still more defensively invested and hold higher than normal cash levels. The cash will be invested if the optimistic views prevail but will help reduce losses if the pessimistic views prevail.
ASSET CLASS REVIEW This section will give you an insight into our current thinking, as we have attached some charts that look interesting. This month we focus on charts which are good at informing us about the state of the UK and global economies. UK Gilt Yields a good indicator of future interest rates The chart below is the yield (interest rate) that you would get from investing in a 15-year UK Government Bond. If it starts to rise then it is likely to mean that UK interest rates will rise. You can see that over the last year the red trend line has drifted slightly higher but over the last month yields have fallen a little: This chart is also a good indicator of defined benefit transfer values as it is used by the actuaries in their calculation. The lower the yield then the higher the transfer value will be. These historic lows have been one of the main reasons that we have seen money flow out of final salary pension funds. US Unemployment if it rises then it could be a warning sign that a recession is coming As you can see US unemployment is continuing to fall to historic lows. You can also see that the recessions at the start of the century and in 2008 were preceded by low unemployment but the trend had started to change. Low unemployment can be an indicator that the economy is booming which can lead to high inflation and interest rate rises the perfect storm for a boom and then bust. When this current downward trend in unemployment changes then we may be at the beginning of a bust, but it is still falling.
Gold a good indicator of inflation coming Gold tends to do well when inflation is running ahead of central banks willingness to raise interest rates. At the present time the US Federal Reserve is raising interest rates without headline inflation yet surging higher so Gold has remained subdued: Sterling-an indicator of a good/bad Brexit In the aftermath of the Brexit vote, Sterling fell to new lows as global investors feared that the UK economy would fall into recession. This has not happened, and Sterling started to rise again as the negotiations started to look favorable for the UK. However, as you can see, over the last month the value of the British Pound has started to fall again:
Oil - rapid rises can cause recessions and high inflation Some economists argue that the 2008 recession was not caused by the banking crisis but by the spike in the oil price. This is because a high oil price takes money out of developed economies, transferring it to the oil-rich nations. The chart below shows that the oil price is rising again and has more than doubled since the low of 2016. If it rises higher then this could be the trigger for another recession. In Summary The main economic indicators that can forewarn us of difficult future economic conditions appear to be benign. The main concern for the UK remains Brexit and the only concern for the global economy currently appears to be oil. Of course, Trump-induced trade wars could cause the next recession. If this does happen then stock markets globally will start to fall below trend and our investment philosophy will start to reduce equity exposure in most of our portfolios.
THE STOCK MARKET WORLD CUP The FIFA World Cup commenced on the 14 th June in Russia. At the time of writing there are eight teams left with the final on Sunday 15 th July. Thirty-two teams started the competition and we thought that it would be interesting to compare the stock market performance of the competing countries from the start of the World Cup to the 2nd July. There were five teams for which we couldn t get any performance data due to their stock markets being non-existent or too small to measure properly Panama, Costa Rica, Colombia, Iran and Senegal. The performance during the World Cup in sterling terms ranged from minus 8.14% to positive 7.14%. We were shocked at this differential in such a short space of time. This highlights the volatility that we are experiencing in stock markets at the moment. The winner (so far) of the stock market World Cup is. RUSSIA. Here is a list of the top and bottom performers: TOP Russia 7.14% Tunisia 7.13% Serbia 6.21% Mexico 4.08% Egypt 2.29% BOTTOM Japan -3.97% Germany -4.81% Poland -4.90% South Korea -5.46% Argentina -8.14% The FTSE 100 has lost 1.01% by comparison. We will let you know next month who the winner is at the end of the World Cup.
WHAT RISK ARE YOU TAKING WITH YOUR MONEY? One of the most important factors that affects the returns of your portfolio is the risk that you are taking. Our objective is to reduce the risk of your portfolio during times of economic difficulty and increase it during the good times. In essence, we protect your wealth during bad investment periods and keep you fully invested to ensure you benefit during good investment periods. If this is achieved successfully, then the overall risk to your portfolio will reduce, and your losses will be minimised during the bad times. But how do we measure the risk that you are taking? The best measure is something called volatility. This is simply a measure of how much your portfolio moves on a daily/weekly basis. For example, if a portfolio grows by 10% in a month, and then falls by 5% the next, it is much more volatile than a portfolio that grows by 2.5% in each of the two months. So, what are the risks in our portfolios? As our investment philosophy pursues a trend-following investment strategy, you should expect volatility to increase after a strong period of stock market returns but be much lower during periods of weaker investment returns. The volatility of the portfolios relative to their benchmarks is as follows: Broom Consultants Investment Portfolios 1-Year Volatility Volatility Since Launch Benchmark Funds 1-Year Volatility Volatility Since Launch Foundation 3.62 3.84* Foundation 1.81 1.89* Cautious 4.48 5.03 Cautious 3.44 6.02 Balanced 4.99 7.07 Balanced 4.01 6.78 Adventurous 6.45 9.54 Adventurous 5.85 9.74 Dynamic Equity 8.31 8.77* Dynamic Equity 6.01 6.65* In comparison, the UK stock market s FTSE 100 index has a volatility of 10.61 over 1 year and 13.74 since launch, and the emerging market equities benchmark has a volatility of 11.08 over 1 year and 18.58 since launch. *Please note that the Foundation and Dynamic Equity portfolios launch date was different from the Cautious, Balanced and Adventurous.
FINAL COMMENT We are currently in a ranging environment for equities in which the glass is neither half full nor half empty. Eventually investors will become more optimistic or more pessimistic and markets will break higher or lower. Our portfolios will react to either direction by increasing or decreasing exposure to stock markets. From an economic viewpoint we appear to be in great shape with no indications of recession looming. However, from a political point of view, we have much uncertainty. Broom Consultants Limited Sterling Court, 4 Gresham Road, Brentwood, Essex. CM14 4HN Tel No. 01277 202222 www.broomconsultants.com Authorised & Regulated by the Financial Conduct Authority Please note that this document does not constitute a recommendation. It is intended only to provide you with a guide to how Broom Consultants manages client money. The past is not necessarily a guide to future performance. The value of any investments can go down as well as up and you may not get back the full amount invested. Taxation is subject to change and you may have to pay tax on any gains. The Broom Consultants portfolios are unlikely to exactly mirror our clients portfolios due to the timing of the initial investment and the speed of response to our fund switch recommendations as well as the effect of charges. The figures above therefore assume a client invested on the launch day and has responded immediately to our recommendations. As from the middle of 2016, the portfolios have been run on a discretionary basis by WM Capital Management. All figures and charts are provided by Financial Express.