Commentary on September 2014
Strength in US data this month contrasted sharply with weakness elsewhere,. Three important events, the September Federal Reserve meeting, the announcement of details of the ECB’s asset purchase programme and the Scottish referendum, injected volatility into markets.
German industrial output suffered its biggest monthly decline in more than five years in August, raising fears that Europe’s biggest economy might be heading for recession.
The ECB first excited markets by announcing a new policy of asset-purchases, but then disappointed with a lack of clarity and follow-through. Market perception was that the ECB’s hands were tied by a reluctant Germany and that it would struggle to implement sufficient measures to stimulate economic growth.
At the start of the month the FTSE 100 peaked at a 14-year intra-day high of 6894, but this was short-lived and the index ended the month down nearly 3%.
Investors’ lack of appetite for risk was also reflected in high-yield bonds which fell by over 2%. Government bonds fell over the month but have since rallied as stockmarkets continued to slide. Property has remained a consistent performer and has returned around 10% year-to-date.
We are detecting a slight autumnal chill in the air. The US apart, recent data has been signalling a return to weaker growth, markedly so in Germany, the Eurozone’s engine room. It’s too early to tell how soon Germany will benefit from a lower exchange rate or just how badly the sanctions with Russia will affect business.
The UK growth story remains intact although there have been signs of a slowdown in both the housing and manufacturing sectors. We still feel that all the stops will be pulled out to ensure happy voters ahead of the May election and that even a rise in interest rates will be portrayed positively as a return to consistent growth.
The market call is a tricky one; this sell-off may be no more than those experienced several times during the year, generally followed by another leg higher. But markets are looking tired and will no longer be able to rely on the US asset purchase programme.
We still believe that the greater risk lies in a more meaningful correction and would look to use this opportunity to buy funds at the lower levels.
How are we currently positioned?
We remain under-weight fixed income funds, preferring the higher yield offered on commercial property and the lower volatility of absolute return funds.
We have continued to change the composition of our fixed interest content, reducing our strategic bond position on our lower-risk portfolios in favour of bonds that will benefit from rising interest rates.
In equities we switched the Invesco Perpetual High Income fund into Neil Woodford’s new Woodford Equity Income fund.
On our higher-risk funds we took advantage of a resolute technology sector to sell the remainder of our tech funds, switching into less volatile absolute return funds.
Our core Asian fund significantly out-performed the sector, falling by less than 1% against an index fall of 5.7%. Although the emerging market sector might suffer some turbulence as the US Federal Reserve brings its quantitative easing to an end, we believe that it still represents good value over the longer term.