Investment returns were relatively flat this year to mid-July, but we’ve since seen uncertainty and some quite big losses in recent weeks. Political tensions have certainly played a part and we could see more of the same for a little while yet. However, US and UK data indicate that the global recovery is still very much on track and we believe our customer portfolios remain well positioned to benefit from long-term economic growth.
Market calm gives way to equity losses
Financial markets have been relatively quiet over the last few months. Through to early-July the FTSE 100 had a daily return within a range of plus or minus 1% for 49 trading days in a row – something we haven’t seen in 20 years. Over that period stocks gained less than 1%.
Since then we’ve witnessed sizeable losses in equity markets, while gains in bonds have not been significant enough to offset this, so overall investment returns have been somewhat poor.
Stocks and bonds levelling out returns
We know that markets go down as well as up, but they can also go sideways for extended periods as well. Our customers’ investment portfolios are diversified – that is, they contain a range of investments, designed to spread risk and – so some areas may be making gains while other holdings are making losses. The long-term strategy is of course for the gains to outweigh the losses but there will always be periods where they even out and the net sum is zero, or even negative.
This year we have seen relatively poor performance from equity markets while bonds have eked out only small gains.
It’s also important to note that market returns quite often happen in a cluster rather than a steady gain each month. For instance, last year the FTSE gained 14%, but 8% of that gain came in just January and February.
Political tension causing uncertainty
There has been plenty of news over the past month or so to unsettle financial markets, especially higher-risk equity investments.
On the geopolitics side there are many flashpoints: Russia’s build-up of troops along Ukraine’s border, Europe’s response with sanctions, the Israel-Palestine conflict and Islamic State incursions in Iraq.
Economic events have also had an impact. A major Portuguese bank has recently gone bust and Argentina has again defaulted on its debt.
Overall, these events have hit Europe harder than elsewhere. For instance, the top 30 stocks in Germany have lost 9% over the past few weeks.
US data supports global recovery
Away from the influence of political events, market trends are largely denominated by two considerations at the moment: the strength of the US economy, which is the key driver of global markets, and when the US central bank will start to raise interest rates.
We’ve seen some buoyant data from the States recently. The US expanded by 4% in the past quarter and new business for service sector companies is at a nine-year high. Many companies have posted good results lately, with 70% of US companies beating profit forecasts. This is all good news for the long term, though it can cause some skittish behaviour in the short term as it means interest rates are likely to be going up sooner rather than later.
Economies are in a transition phase from being on life support to a more ‘normal’ path – in other words interest rates should no longer be near 0%. As interest rates steadily go up, we will no doubt be in for more ebb and flow in the markets but, ultimately, improving growth and economic stability is likely to win out and be rewarding for investors.
To us, strong growth is good, not bad.
Cautious approach to bonds
Most government bond markets have benefited from the recent sell-off in stock markets, but we believe this will be short-lived. Stronger growth is unlikely to be better for bonds long term.
We’ve taken further steps this month to ensure our bond holdings are sufficiently defensive in our customers’ portfolios. This means that portfolios have not gained as much this year as if they had been orientated towards good returns from bonds but it also means they’re better placed for the market trends we expect to see in the long run.
In equities, we believe that European stocks look good value and so our customers’ portfolios remain upweighted with eurozone stocks.
Meanwhile, we have added Indonesian investments to our customers’ medium and high-risk portfolios. Following the election in Indonesia, where some 190 million votes were cast, we believe the long-term outlook is a bright spot within the emerging markets, albeit not without considerable challenges ahead for the new reformist president.
About this update: This update was filmed in August 2014 and covers figures for the full month of July 2014 unless otherwise stated. Data sources: Bloomberg and Macrobond.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.