Commentary on June 2014
June saw mixed returns across asset classes, ranging from a further 4% rise in Russian equities to losses of around 2-3% across Europe. In the US the S&P 500 continued to make record highs, but in Sterling terms gains were diminished by the falling Dollar. In the UK the FTSE 100 index had a lack-lustre month falling by just over 1%.
The ECB announced a package of measures aimed at stimulating growth and arresting the fall in consumer prices. These measures included cutting interest rates to record lows and providing cheaper long-term financing.
The Governor of the Bank of England warned that interest rates might rise earlier than the market was currently expecting; the market had been expecting rates to start rising in the Spring of 2015, as guided by the Governor of the Bank of England a month ago!
Bond yields in the UK rose slightly to reflect the change in interest rate expectations, but yields continued to fall across Europe following the cut in interest rates.
Sterling rose to a 5-year high against the US dollar, boosted by more evidence of industrial growth. Whilst this is helping to keep the lid on inflation it’s making life harder for our exporting businesses. It also means that some gains in overseas funds are lost in currency translation.
We are happier to believe in the UK growth story than in most other economies. There’s a greater consistency of economic data pointing towards an expanding economy with, as yet, few signs of inflationary pressures. We expect this momentum to build going into the general election next May.
However, the FTSE index is currently looking tired and last month shares failed to test the recent highs. For now there is technical support around the 6600 level but 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 repeated 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 high-yield bonds continues and this has led to a weakening of security offered on some new issues. 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.
During the month we increased our exposure to property across the funds, switching out of absolute return funds. We like the higher yield currently offered by property relative to fixed interest and absolute return funds.
In equities, we generally prefer the defensive qualities of income funds to growth funds.
We continue to prefer the value in emerging markets to developed markets, although we recognise that this differential has tightened over the past few months.
Our gold funds had a strong month, gaining between 10-14% on the month. This supported our view that gold has bottomed and is a sensible long-term hold.