Commentary on January 2014
- In last month’s commentary we said that 2014 was likely to be another volatile year and that the main focus would be on how well the US and UK economies coped with further tapering of QE.
- During January the FTSE traded a 450-point range, the US Fed announced a further $10bn cut in the monthly QE stimulus and the Dow fell 800 points from its high.
- Initially the sell-off in equities appeared to be down to fears that strong growth would lead to monetary tightening sooner than expected. The unemployment rates in both the US and UK fell close to the targets set by their central banks for having a think about raising interest rates.
- But over the next couple of weeks this turned to concern that perhaps the growth story wasn’t as strong as some first thought. Data across many major economies showed a trend of falling inflation and more subdued growth, particularly in some emerging markets.
- The UK economy in particular looks to be in good shape and for now looks less vulnerable than most other developed economies.
- We’re a bit more cautious on the US where the economic data has been more mixed and some companies failed to match their earnings forecasts.
- We view January’s pullback as a fairly normal correction following December’s ‘Santa rally’, bringing equities back to fair value.
- If stockmarkets weaken further during February then we would view that as a buying opportunity.
- Bond yields fell during January and in our view remain too low to compensate for the risk of capital loss; we think that property currently offers better returns.
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. We used the rally at the start of the year to slightly reduce our exposure to equities, switching into the Insight Absolute Return fund.
- We also switched into the Standard Life UK Property fund which is looking to benefit from demand for commercial property expanding from the South-East.
- Across the balanced and higher-risk portfolios we remain invested in the main developed markets but with minimal exposure to Europe. We took profits on the AXA Framlington Biotech fund pending better buying opportunities.
- Following a positive meeting with the manager we switched into the Standard Life UK Equity Income Unconstrained fund. This fund is run in a different style to our existing income funds, offering a more flexible approach across small, medium and Blue-chip companies and placing a greater emphasis on future dividend growth.
- We still believe that there’s more mileage in Japanese and Asian equities. Emerging markets continue to offer good value going forward.
- Our small weighting in gold and commodities served us well during this more recent spate of volatility.
That’s our current view, but please be mindful of our small print, borrowed from the great economist John Maynard Keynes,
“When the facts change, I change my mind.”