market commentary - june 2015

June 2015

Chart of the Month

Gareth Lewis CHIEF INVESTMENT OFFICER

Louie French RESEARCH ANALYST

MARKET COMMENTARY

The May inflation report from the Office for National Statistics (ONS) confirmed that the UK entered a period of deflation for the first time in over 50 years. The Consumer Prices Index (CPI) fell by -0.1% in the year to April 2015, down from the zero reading recorded in March. However, with the overall decline mainly due to declining food and fuel prices, the Bank of England (BoE) expects that inflation will rebound later this year as these factors drop out of the annual calculation.

For inflation to reach the BoE’s 2% target within the next two years, sustained growth in UK wages appears necessary. However, if workers start accepting lower pay increases on the back of stagnant prices of goods and services, UK deflation may become more entrenched than many hope. With the world continuing to suffer from an excess of manufactured supply, policy focused exclusively on increased demand looks unlikely to mark a material shift to higher inflation.

momentum. However, the Fed Chairman adopted a more upbeat tone, signalling a rate rise could be appropriate this year, if the economy improves as she expects.

The latest data from Japan showed an acceleration in its recovery from last year’s slump as the economy expanded at an annualised rate of 2.4% for Q1 2015, its second successive quarter of growth. There was also positive news from the Eurozone, where the European Commission raised its 2015 growth projection to an annualised rate of 1.5%. May reports showed local economic confidence remaining near a four-year high as businesses and consumers shrugged off concerns of a potential Greek debt default.

Broad global equity indices struggled to make headway through the month, as concerns over Greece and comments from US Fed Chairman Janet Yellen about high equity valuations weighed on markets. Amongst the outliers, Japanese equities were the strongest performer as yen weakness supported the outlook for their exporters; whilst emerging markets were notable poor performers, giving back much of their April gains. Within fixed income, western sovereign bond markets continued to be volatile.

In the US, the economic outlook remained clouded by mixed reports, with weaker retail sales, industrial production and consumer sentiment data indicating the economy might be losing

Perc

enta

ge (%

)

Market & Economic Update

June 2015

Our view – asset allocation summary

GENERAL SUMMARY• Over the last seven years Central banks across the developed world have added over US$7 trillion

of additional liquidity to the global economy in an attempt to stave off the worst effects of the banking crisis. While this stimulus has helped prevent a more severe downturn in activity, it is clear that much of this monetary largesse has become trapped within the financial system.

• While the flow of liquidity will dwindle now the US Federal Reserve has ended its asset-purchase programme, the pace of reduction will be mollified by the stimulative policies being pursued within the Eurozone and Japan.

• The recent increase in bond and currency market volatility points to investor uncertainty over how these two forces will play out.

EQUITIES• Following the prolonged rally in prices most equity markets now look fair value relative to their

own history. The outlier is probably the US where the combination of aggressive share buybacks and debt refinancing has driven corporate margins to historic highs.

• In contrast Eurozone equities valuations remain realistic, reflecting the more subdued levels of economic activity. However, as ECB QE increases liquidity flows and pushes down the currency, we would expect the region’s equity markets to benefit as investors reappraise prospects.

• Despite their strong performance last year, Japanese equities continue to look good value as rising corporate earnings and strong investor flows sustain prices.

• We are cognisant that investment in the UK market exposes performance to commodity prices from the large-cap mining stocks based here, but believe that much of the concern is already in the price. The UK market also offers income in this low-growth, low-inflation environment.

• There is a performance differential between Emerging Markets and Asia Pacific, with the former more closely correlated to commodity prices. Additionally, there is increasing dispersion between country and region in terms of valuation and returns, with many Asia Pacific currencies pegged to the US dollar, and competitiveness being eroded in the face of Japan and devaluation of its currency.

FIXED INCOME• As expected Eurozone bond markets have responded to the ECB asset purchase programme by

selling off aggressively. QE is an inherently pro-growth and pro-inflation policy which does not sit easily with the low yields on offer across Europe during Q1.

• One worrying aspect that this has highlighted is the deteriorating conditions for all world bond markets, with falling prices rapidly transmitting elsewhere, despite more rational valuations. The resulting rise in yields in both the US and the UK leave Government bond markets in these countries look realistically priced for the current uncertain economic climate.

• Emerging market hard currency debt is a concern, across sovereign, corporate and bank debt. Many of these countries are commodity dependent, and the continued strength of the US dollar is seen as a negative. There is a lack of liquidity in this market, which is likely to be accentuated during risk-off periods.

• The Asset Allocation Committee reduced the weighting to fixed income by 3% in May adding the 3% to cash. High yield was reduced by 1.5% with the lack of liquidity in the high yield market a particular concern.

COMMERCIAL PROPERTY • Commercial property prices remain well below their 2007 highs, and the IPD forecasts are positive.

The UK economy is relatively strong and property returns are believed to be more attractive. We are overweight UK commercial property.

COMMODITIES • We believe the asset class remains relatively unappealing, even more so due to US dollar strength.


2 Market & Economic Update • June 2015

NORTH AMERICA, UK AND WESTERN EUROPE

jobs data was positive in the month, with the US non-farm payrolls data showing 223,000 jobs were created in April. The unemployment rate was down from 5.5% to 5.4%, whilst wages were up by only 0.1% month on month. Retail sales were flat on the previous month, missing expectations of a 0.2% increase. Meanwhile the Fed Chairman Janet Yellen adopted a more upbeat tone, signalling in her latest speech that a rate rise could be appropriate this year, if the economy improves as she expects.

• In the UK the second estimate of GDP growth in the first quarter of 2015 disappointed, with growth confirmed at only 0.3%, its lowest level since the fourth quarter of 2012. The extent to which the first quarter GDP figures were affected by political uncertainty is yet to be seen, but the Bank of England did lower its UK growth forecast in its quarterly inflation report released in May. The BoE estimates that full-year GDP growth will be around 2.5%, down from the 2.9% estimated in February, and has similarly downgraded the forecasts for 2016 and 2017. However, in the supporting commentary the BoE did state that the outlook for growth remains solid and that it expected inflation to pick up towards the end of the year (see chart of the month text). Other data releases in May were more positive on the health of the UK economy. Firstly, the UK continued its recent trend of strong job creation, with the unemployment rate falling again by 0.1% to 5.5%, whilst average wages rose by 1.9% year on year. UK retail sales were also up, rebounding

strongly in April and smashing forecasts, with volumes up 1.2% month on month and 4.7% year on year. UK manufacturing PMI for May remained in expansionary territory. However, productivity growth and the trade deficit remain a challenge for the UK economy, as the rebalancing of the UK economy remains a slow process.

• European economic data showed signs of improvement as first quarter GDP expanded by 0.4%, up 1% from the same quarter last year. A combination of low inflation and a weaker euro – linked to the European Central Bank’s quantitative easing programme – clearly providing a boost to the bloc’s fortunes as household expenditure rose. Notable country performance came from France, which beat expectations by growing 0.6% in the first quarter. With periphery countries such as Spain also showing signs of improvement, the European Commission has raised its growth forecast for the Eurozone in 2015 to an annualised rate of 1.5%. Flash estimates of May’s inflation data were also up, with headline inflation up from zero to 0.3% year on year, as the price of food and services showed modest increases. Core inflation, which excludes energy, food, alcohol and tobacco, was also up to 0.9% year on year. However, with unemployment in a number of countries still high and the well reported Greek debt crisis showing few signs of reaching a resolution, the Eurozone bloc needs a continued spell of economic growth. The extent to which loose monetary policy from the ECB will help the underlying economies in the long run is yet to be seen.

DEVELOPED EQUITY MARKET VALUATIONS:

S&P 500 – PE: 20.4x, Yield: 2.1%

FTSE All Share – PE: 16.0x, Yield: 3.3%

*DataStream Total European Market – PE: 18.0x, Yield: 3.0%

*Includes the UK.

• Developed market equities struggled to make headway in May, with the FTSE 100 TR returning only 0.72% in the month. After a strong month in April, key large-cap sectors, such as basic materials and oil & gas, were down in May, returning on a total return basis -2.60% and -3.48% respectively. UK mid and small caps delivered stronger returns in May as investor confidence in the UK rose following the Conservative’s surprise majority victory in the UK General Election. The FTSE 250 TR was up 4.20% over the month, whilst the FTSE Small Cap TR returned 3.20%.

• Meanwhile, in Europe the FTSE World Europe ex UK TR index returned 1.30% in local currency terms and -0.19% in sterling terms, highlighting a weaker month for the euro versus sterling. The earnings outlook for European equities appears much brighter, but uncertainty over Greece continues to dampen investor confidence. In the US the S&P 500 TR was up 1.29% in local currency terms and 2.0% in sterling terms in May.

• In the US, the economic outlook remained clouded by mixed reports. Firstly, already weak Q1 GDP data was revised down from an annualised rate of 0.2% to -0.7%, as a strong dollar and unfavourable weather conditions saw GDP growth drop dramatically from the 2.2% recorded in the fourth quarter of 2014. The Chicago PMI, which is a leading economic indicator, was also sharply down in May, falling to 46.2 from 52.3 in April, casting doubts over the expected rebound of the US economy in the second quarter of 2015. However, the latest US

Source: FactSet

Perfo

rman

ce (%

)

DEVELOPED MARKETS, PERCENTAGE GROWTH, TOTAL RETURN

FTSE 100 TR S&P 500 TR FTSE World Europe ex UK TR

Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 1590

95

100

105

110

115

120


3

ASIA, JAPAN AND THE EMERGING MARKETS

Source: FactSet

Perfo

rman

ce (%

)

MSCI AC Asia Pacific ex Japan TR

Topix TR

MSCI Emerging Markets TR

ASIAN & EMERGING MARKETS, PERCENTAGE GROWTH, TOTAL RETURN


95

100

105

110

115

120

125

sterling terms. In US dollar terms, the MSCI AC Asia Pacific ex Japan TR index was down -2.65%, whilst the MSCI Emerging Markets TR index fell -3.99%. Notable poor performers in the Emerging Markets were the Brazilian and Russian equity markets, which fell -11.7% and -5.7% respectively in US dollar terms. In Asia the Shanghai Composite index was again one of the strongest performers over the month rising 4.0% in US dollar terms. However, with the MSCI still not including domestic Chinese A shares in its index calculations, the MSCI China TR was down -3.69% in May following a weaker month for Hong Kong’s Hang Seng index and highlighting some of the complexities of investing in China.

• Staying in China, the People’s Bank of China cut interest rates for the third time in six months as its economy continued to show signs of slowing. The Central bank cut the benchmark deposit and lending rates by 25bps whilst at the same time also relaxing some of the controls around interest rates as part of another step towards rate liberalisation. The news followed softer-than-expected inflation data, which was 1.5% year on year, and the latest producer price index data, which was down -4.6% year on year. The Chinese property market also continued to show signs of weakness, with the average house price down -6.1% from a year ago.

Topix PE: 19.7x, Yield: 1.6%

• Japanese equities led the way again in May, with the Topix TR returning 5.08% in local currency terms and 2.05% in sterling terms. With the Nikkei 225 index above 20,000 index points for the first time in 15 years and the yen trading around its ten-year low versus the US dollar, Japanese equities have evidently been supported by the Bank of Japan’s asset-purchase programme. Additionally, with a number of Japanese pension funds reportedly set to transfer a large percentage of their asset allocation from government bonds to domestic stocks, this momentum appears set to continue.

• On the economic front, the latest data from Japan showed an acceleration in its recovery from last year’s slump as the economy expanded at an annualised rate of 2.4% in the first quarter of 2015, its second-successive quarter of growth. Lower oil prices and higher investment income have also resulted in Japan having its largest current account surplus in seven years at ¥2.8 trillion. The labour market continued to tighten with the unemployment rate falling again in April to 3.3%.

• Outside Japan, broader Asia Pacific and Emerging Market indices had a poor month after performing strongly in April. The MSCI AC Asia Pacific ex Japan TR index returned -2.0% and the MSCI Emerging Markets TR index returned -3.3% in


4


June 2015

Source: FactSetBofA Merrill Lynch Global High Yield TR

BofA Merrill Lynch Sterling Corporate Bond TR

Perfo

rman

ce (%

)

FIXED INTEREST MARKETS, PERCENTAGE GROWTH


96

98

100

102

104

106

108

• In Europe bond yields continued to rise amid the backdrop of the ECB’s inflationary quantitative easing programme and the ongoing Greek debt crisis. German 10-year bund yields rose 18bps in May, starting the month at 0.36% before finishing May at 0.54%. Yields had reached 0.73% in the middle of the month.

FIXED INCOME

• The BofA Merrill Lynch Sterling Corporate Bond TR and the BofA Merrill Lynch Global High Yield TR indices were both up moderately in sterling terms during May, returning 0.5% and 0.7% respectively.

• However, May was a subdued month for high yield returns in local currency terms following a relatively strong start to 2015. The BofA Merrill Lynch Global High Yield TR index returned 0.04% in May and is up 2.90% year to date in US dollar terms.

• Meanwhile, the removal of political uncertainty following the UK General Election was positive for gilts in May, with the Barclays Sterling Gilt TR index returning 0.45% over the month. UK 10-year gilt yields ended the month roughly where they began at around 1.86%, but had reached 2.0% in the middle of the month before a late rally.

• US treasuries experienced similar movements to their European counterparts in May, with US 10-year yields finishing the month 15bps up at 2.18%, after reaching 2.29% towards the middle of the month.


June 2015CURRENCIES

• After a weak month in April, the US dollar was up 0.70% versus sterling in May, with sterling starting the month strongly following the Conservatives surprise election result before weakening against the dollar towards the end of the month as US interest rate expectations rose.

• Meanwhile, the euro and the Japanese yen were weak in May, with the backdrop of their individual quantitative easing programmes continuing to impact currency valuations. The euro was down -1.47% in sterling terms and -2.16% in US dollar terms, whilst the Japanese yen fell -2.88% in sterling terms and -3.57% in US dollar terms.

• Lastly, the Russian rouble was down -1.92% against the US dollar in May, as its rebound from a weak 2014 showed signs of slowing.


90

95

100

105

110

Source: FactSet

Euro

Japanese yen

US dollar

Perfo

rman

ce (%

)

CURRENCY RETURNS RELATIVE TO GBP, PERCENTAGE GROWTH



COMMODITIES PERFORMANCE – 1st - 31st MAY 2015

Index Total Return Level % Change

-12 -10 -8 -6 -4 -2 0 2 4 6

Aluminum

Nickel

Sugar

Coffee

Natural Gas

Copper

Cotton

Soybeans

Brent Crude

Corn

Bloomberg Commodity Index

S&P GSCI

Platinum

Heating Oil

Gas Oil

Crude Oil

Kansas Wheat

Wheat

Unleaded Gas

Live Cattle

Lean Hogs

Silver

Feeder Cattle

Cocoa

Gold

Zinc

Lead

COMMODITIES

S&P GSCI Industrial Metals sector, which fell dramatically by -7.70% after a positive month in April. The Agriculture and Energy sub-sectors were also down in the month, falling -3.49% and -0.64% respectively. The Livestock and Precious Metals sub-sectors produced positive returns of 1.87% and 0.93% respectively.

• Unsurprisingly, the worst-performing individual commodity indices in May were Aluminium and Nickel, which like a number of commodities, have seen their prices fall as supply continues to outweigh demand, particularly from China.

• After leading the way in April, the individual oil commodity indices were down moderately in May on a total return basis. Prices rose towards the end of the month following news of further reductions in the US rig count, but with little prospect of OPEC cutting production, prices are unlikely to rise dramatically in the near future without some form of geopolitical crisis occurring.

• Overall May was a weak month for commodity markets, with only a relatively small number of individual commodity indices producing positive returns.

• The two headline indices, the Bloomberg Commodity index and the S&P GSCI index, had previously produced positive returns in April. However, both were down in May, falling -2.70% and -2.00% respectively in US dollar terms.

• Performances of the S&P GSCI sub-sectors were mixed in May, with the worst returns coming from the

Commodity monthly performance, May 2015. Indices highlighted in yellow. Data in the above table in US dollars. Source: FactSet



June 2015

Source: FactSetHFRX Global Hedge Fund GBP

Perfo

rman

ce (%

)

HEDGE FUND RETURNS, TOTAL RETURN


97

98

99

100

101

102

103

HEDGE FUNDS

• May was a relatively flat month for the HFRX sub-indices, with returns ranging from 0.34% to -1.01% in sterling terms.

• The worst-performing sub-index in the month was the HFRX Equity Market Neutral returning -1.01% in sterling terms.

• The best-performing sub-index in May was the HFRX Macro/CTA, which returned 0.34%.

• The headline index, the HFRX Global Hedge Fund GBP, returned 0.3% in May.

Source: FactSet

0

0.5

1

1.5

2

2.5

Perfo

rman

ce (%

)

Capital growth

Income return

Jul 14Jun 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15

MONTHLY IPD RETURNS*

Source: FactSet

0

0.5

1

1.5

2

2.5

Perfo

rman

ce (%

)

Capital growth

Income return

Jul 14Jun 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15

MONTHLY IPD RETURNS*PROPERTY

• The IPD UK Property Monthly Total Return index increased by 0.99% in April, compared to 1.3% in the previous month.

• Whilst income returns remained stable at 0.46%, capital returns were down from 0.83% in March to 0.53% in April.

• The Office and Industrial sectors were once again the best performing in April, increasing by 1.4% and 1.2% respectively on a total return basis over the month. The Retail sector produced a total return of 0.6% in April.

*Index data is released mid-month and therefore figures are only available with a one month lag.



9

June 2015

DATASHEET – LATEST MARKET RETURNS TO THE 31 MAY 2015 PERCENTAGE RETURNS FOR MAJOR ASSET CLASS INDICES.

Market 1m 3m 6m 2014-15 2013-14 2012-13 2011-12 2010-11 3 Year 5 Year

S&P 500 TR 2.0 1.9 5.7 22.9 8.9 29.2 6.5 11.2 72.9 104.7

FTSE All-Share TR 1.4 2.7 7.5 7.5 8.9 30.1 -8.0 20.4 52.2 68.6

FTSE 100 TR 0.7 1.9 5.8 5.7 7.8 28.4 -7.7 19.1 46.3 60.9

FTSE Europe ex UK TR -0.2 2.8 5.2 4.7 13.4 43.3 -24.2 24.2 70.2 60.2

FTSE EuroTop 100 TR -0.1 2.0 3.8 4.0 10.8 36.6 -18.4 20.2 57.4 54.4

EURO STOXX 50 TR -1.2 0.3 1.7 0.6 15.6 45.1 -28.4 18.4 68.8 43.2

Topix TR 2.1 8.0 17.6 27.9 -3.2 27.2 -2.7 -3.7 57.5 47.5

MSCI AC Asia Pacific ex Japan TR -2.0 4.1 8.2 15.7 -1.4 23.0 -11.9 17.7 40.4 45.6

MSCI Emerging Markets TR -3.3 3.3 3.6 10.3 -5.4 16.2 -14.5 14.0 21.2 18.2

Numis Smaller Companies (EX-IT) TR 4.7 6.9 15.7 10.4 19.1 39.3 -7.7 32.4 83.2 123.9

BofA Merrill Lynch Global High Yield TR 0.7 2.7 3.2 7.9 -1.2 19.0 7.7 6.5 26.9 45.6

BofA Merrill Lynch Sterling Corporate Bond TR 0.5 -0.3 3.1 9.1 3.5 13.0 7.6 8.7 27.6 49.1

Markit iBoxx Sterling Corporates TR 0.4 -0.4 3.3 8.9 3.7 13.4 6.2 8.6 28.1 47.6

HFRX Global Hedge Fund TR 0.3 1 1.9 1.3 3.1 6.6 -6.6 5 11.4 9.2

FTSE British Government All Stocks TR 0.4 0.3 2.2 10.2 0.5 -1.0 16.3 5.3 9.6 34.3

Euromoney Global Mining TR -3.5 -4.3 -3.3 -11.4 -9.1 -7.4 -30.6 22.2 -25.4 -36.7

Bloomberg Commodity TR -2.0 -1.2 -8.3 -17.1 -7.4 3.4 -17.5 17.4 -20.6 -23.1

S&P GSCI TR -1.3 2.7 -11.4 -29.0 -2.1 4.6 -10.7 18.1 -27.3 -23.3

Gold Index 0.9 -0.3 1.9 4.3 -18.7 -9.1 8.4 12.3 -22.9 -6.1

FTSE WMA Stock Market Balanced TR 0.7 2.0 5.5 10.5 5.9 20.4 -1.8 13.7 40.9 57.4

FTSE WMA Stock Market Growth TR 0.8 2.3 6.0 10.8 6.4 24.2 -4.7 15.3 46.4 60.8

FTSE WMA Stock Market Income TR 0.5 1.5 4.9 9.7 5.0 15.5 1.4 12.6 33.0 52

LIBOR GBP 3 Month 0.0 0.1 0.3 0.6 0.5 0.6 1.0 0.8 1.7 3.5

US Dollar 0.7 1.3 2.6 9.9 -9.6 1.5 6.9 -11.7 0.9 -4.8

Japanese Yen -2.9 -2.4 -1.8 -9.9 -10.3 -21.2 10.8 -1.1 -36.3 -30.2

Euro -1.5 -1.0 -9.7 -11.7 -4.8 6.4 -8.0 3.4 -10.6 -14.9

1 Year ending 31 May. Source: Lipper (to 31 May 2015 in GBP. Currency movements are vs. sterling.)


IMPORTANT INFORMATION

The value of your investments, and the income derived from them, can go down as well as up, and you can get back less than you originally invested. Any indication of past performance or quoted yields is not an indicator of future returns. Before investing in funds, please check the specific risk factors on the key features document or refer to our risk warning notice, as some funds can be high-risk or complex, or can be susceptible to risks particular to the geographical area or industry sector in which they invest. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.

Any research or analysis contained in this document has been undertaken by us for our own use and may be acted on in that connection. The contents of the document are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. The document may include forward-looking statements which are based on our current opinions, expectations and projections. It is provided to you only incidentally, and should not be considered a personal recommendation or advice to invest. Any opinions expressed are subject to change without notice.

150615-1415



Bestinvest (Brokers) Limited (Reg. No. 2830297) and Bestinvest (Consultants) Limited(Reg. No. 1550116) are both registered in England and are authorised and regulated bythe Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, London W1J 5BQ.

market commentary - june 2015

Documents

global economy

economic outlook

inflation report

uk deflation

years slump

higher inflation

annualised rate

market economic update