Investment strategy update April 2014

Shaun Port

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Global stock markets have been quite rocky so far this year. Following a 4.2% surge in February, equities fell in March and we’re likely to see some losses in April, in part due to the shifting valuations of big tech companies like Facebook and Google. Our longer term outlook remains positive though, particularly for UK and US stocks.

The start of 2014 has been turbulent for stock markets the world over. A relatively slow January was followed by substantial gains in February, but we’ve since seen steady declines in March and early April.

Medium and high-risk Nutmeg portfolios, which hold a lot of developed market equities, reflect this recent weakness in global markets and have fallen in value slightly, while our low-risk portfolios have been impacted less because they contain more corporate bonds, which have performed reasonably well. In fact, our lowest risk portfolios have actually gone up in value.

It’s particularly unusual to see stock markets struggle at this time of year. Our research shows that over the past 35 years UK stocks have produced a gain 84% of the time during the month of April.

The reasons behind the recent turbulence

There have been a series of specific events that have hit different stock markets. In the UK, for instance, the insurance industry has been impacted by changes in the Budget and the news that the regulator would be reviewing past sales by insurance companies. These events largely contributed to a poor return from UK stocks. Indeed, of the 46 stock markets we track, the return from the UK market in March was the fourth worst, not far behind the struggling Russian market.

To some extent, the ongoing conflict in Ukraine is continuing to be a factor too, and we have seen a nosedive in technology stocks of late. The prices of biotechnology companies, which have risen threefold in the last two years, reminiscent of the internet boom in 2000, have fallen 17% over the past three weeks.

Meanwhile, the information-tech sector has dropped in value by about 5%. That in itself isn’t extreme – we saw similar declines in tech stocks in January and last April – but it’s been making headlines because some major names, the likes of Twitter, Facebook, Google and Groupon, have suffered quite significant losses.

Measuring the new-breed of tech giants

These companies are very difficult to value. They have a comparatively short track record in revenue terms but have a global network of many millions of customers. But the argument that they’ve been wildly over-valued, as some commentators are now saying, is not necessarily true. You could have made such an argument last year – and the year before that. It’s more likely this is just a natural re-adjustment towards their true valuations.

However, the quality of new technology companies entering the UK stock market is more questionable. Recent share offerings from Appliances Online and Just Eat require very big assumptions on their projected revenues to meet the valuations we’ve seen, especially as they are arguably more like existing business models, rather than the land-grab of new social media, big data and financial technology firms.

Long-term opportunities on course

While tech stocks have been going down, the Brazilian equity market has experienced a sharp rally over the same period, as investors seek out other opportunities. We feel it would be foolish to suddenly about-turn and invest in a market like Brazil, which hasn’t changed radically in the past three weeks – certainly not enough to justify the 15% jump! Cheap markets are cheap for a reason and we don’t see a catalyst for somewhere like Brazil to be re-valued.

In our view, the fundamental outlook for the global economy, and in particular for the US and UK economies, has not changed. Equity market declines of this magnitude are not uncommon and often occur in years of strong overall growth.

Salary increases on the horizon

There is also growing evidence that wages are now rising in the UK and US in real terms, after five years of declines. This is encouraging news and points to the economic recovery becoming more sustainable, with a positive impact on equity markets expected this year.

Our extensive analysis gives us confidence in the asset allocations we have for our customers’ portfolios so we haven’t made any significant changes in April. We continue to favour developed equity markets over emerging markets and we particularly like mid and small-sized companies in Europe, US and the UK. Meanwhile, we remain cautious on government bonds.

Finally, we have taken the opportunity to switch into two new exchange-traded funds this month, one that tracks the UK corporate bonds market and one that tracks the Japanese equity market. We feel these two funds will be able to track the markets more closely and more cost-effectively to help increase your potential for net returns.

About this update: This update was filmed in April 2014 and covers figures for the full month of March 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.


Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.

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