Commentary on April 2014
Market Overview
It’s no longer simply a case of saying that stockmarkets rose or fell in unison; although overall volatility fell compared to recent months the correlation across equity markets broke down in spectacular fashion.
For example, the S&P 500 briefly hit a new high before ending the month nearly a percent lower. Asian stocks rose by nearly one percent but Japan dropped almost four percent. And in Europe France rallied 1.6% but Germany, which is more sensitive to events in the Ukraine, fell by 0.3%.
In the UK the FTSE 100 index rose by 3%, but the FTSE 250 (mid-cap) index fell by 2.35% as some investors took profits, rotating out of last year’s winners into the more defensive large-cap shares. Biotech shares dropped a further 5%, making that 20% from January’s peak, and technology stocks collapsed by 11%.
George Osborne’s smug look remained in place as inflation and unemployment in the UK fell whilst the IMF upgraded its growth forecast for 2014 to 2.9%, stating that the UK economy was likely to grow at a faster pace than the US, Germany and Japan. Similarly, a plethora of improving growth data in Euroland included business activity growing at its fastest rate in nearly 3 years. In stark contrast the US saw a shocking first quarter GDP estimate of just 0.1%.
Our Views
The UK economy in particular looks to be in good shape and Chancellor George Osborne will do his utmost to ensure a period of strong growth ahead of the 2015 general election.
The FTSE 100 Index looks to be trading a tighter 6500-6850 range; our view is that although the trend is rising the greater risk lies in a more meaningful correction. We would look to use this opportunity to buy shares at the lower levels.
We remain cautious on valuation levels in the US, but this is the market hitting new highs so we will continue to remain invested for now.
Bond yields in our view still remain too low to compensate for the risk of capital loss. The demand for income has driven yields on 10-year peripheral government bonds like Spain and Italy below 3%. This in turn is restricting any meaningful sell-off in UK bonds which have a higher credit rating and therefore should offer a lower yield. We continue to prefer the potential returns offered by property.
The demand for high-yield bonds continues but we view these yields as insufficient to compensate for the amount of risk involved. For now this remains the most popular bond sector but we are turning increasingly cautious.
How are we currently positioned?
On our lower-risk portfolios we continue to prefer a blend of equity income, property and absolute return funds to fixed interest assets.
However, during the month we slightly reduced this position by switching 5% from the Standard Life Global Absolute Return Strategies fund into a blend of the TwentyFour Dynamic Bond and the M&G Inflation-Linked Corporate Bond funds. The reasoning here was to reduce the level of volatility on our low-risk portfolios, and both of these funds offer some protection against a rise in bond yields.
Some of our top equity funds including the Standard Life UK Equity Unconstrained fund and the Marlborough Special Situations fund suffered from the fall in mid-cap stocks.
Emerging markets are attracting more interest and continue to offer good value going forward. These funds were the best performers across our higher-risk portfolios.
We remain happy with our small holding in gold and commodity stocks.