Investment strategy update December 2013

The global financial markets have seen a drop-off in recent weeks and the impacts have been felt across the vast majority of investment assets. While Nutmeg portfolios have fallen in value too, the performance is better than comparable benchmarks. Plus, economic growth forecasts for 2014 remain strong, so there’s no reason to suspect this is anything more than a blip and most likely a reaction to anticipated tapering in the US (a reduction of its bond buying programme that has been stimulating the economy since 2008).

Equity markets have fallen further over the first half of December. The FTSE 100, which has experienced six consecutive week-on-week drops since early November, is down 2.2% in December so far. While this successive drop in the FTSE 100 is somewhat unusual (only 11 occasions since 1970), the price falls aren’t particularly significant in the grand scheme of things and when viewed in the context of typical investment timeframes of 10 years or more. In fact, whenever we’ve previously seen a continued six-week drop in the FTSE 100, the following 52 weeks have witnessed an increase of 19% on average.

Growth forecasts promising for 2014

Following the government shutdown, we experienced something of a lull in the US, but economic growth has staged a very strong rebound since. Employment is growing at a rapid rate – unemployment has now fallen to 7%. This all points to the Federal Reserve, the US Central Bank, reducing its bond buying program in the near future.

Off the back of this, projected growth in developed markets is also picking up. Here in the UK, the government has just increased its forecast for 2014 growth to 2.3%, while the Bank of England forecasts growth at 3.3% if interest rates remain at 0.5%.

UK equity losses in November

The fact that we saw UK stocks lose around 3.5% in November is merely a short-term reaction to the anticipated tapering in the US. The market is in the process of ‘getting over’ the prospect of tapering and we think financial markets can now easily adjust to this new environment.

Overall, it’s important to look at tapering as merely taking the foot off the accelerator, rather than putting the foot on the brake. The Federal Reserve has so far been able to make a clear divide between ending its bond-buying program and an eventual rise in interest rates, which is not expected until 2016. If this continues to be successful, then most markets should continue to make good process.

The value of stocks

Some commentators are suggesting that stocks are over-valued. Because the stock market recovery began in March 2009, a crop of analysts conclude that the rally is a bit tired and coming to an end. However, there are a few developments that we consider to be important here.

Firstly, on a global basis, stock markets are not overvalued, broadly in line with the average over the past 20 years and at similar levels to 2003, which signalled the start of the bull market that lasted until 2007. Secondly, investors are now investing in stocks after five years of selling – again that is remarkably similar to the trend in 2003. Finally, global growth is improving so top-line sales growth is likely to boost company profits next year.

Changes to Nutmeg customers’ portfolios this month

We have positioned customers’ portfolios towards some key trends for 2014. We still like mid-sized companies in the UK and Europe, to take advantage of the improving economic outlook, while in the US we have small company exposures. We also like UK commercial property.

However, we think the outlook for emerging economies is quite challenging so we do not have any exposure to commodities and we only hold equities in Korea, which we would argue is a developed economy, where growth prospects are quite strong.

As growth improves, government bond yields will continue to rise. Consequently, we are quite defensive on bonds, but we still expect to get reasonably good returns from short-dated corporate bonds in 2014.

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Risk warning

The views and opinions expressed herein are for informational purposes only. They are subject to change without notice, and do not take into account the specific investment objectives, financial situation or individual needs of any particular person. They are not personal recommendations and should not be regarded as solicitations or offers to buy or sell any of the securities or instruments mentioned. The views are based on public information that Nutmeg considers reliable but does not represent that the information contained herein is accurate or complete.

With investment comes risk. The price and value of investments mentioned and income arising from them may fluctuate and you may get back less than you invest. A movement in exchange rates may have a separate effect, unfavourable as well as favourable, on the gain or loss otherwise experienced on the investment concerned. Past performance is not an indicator of future results, and future returns are not guaranteed. We acknowledge an individual’s tax situation is unique and tax legislation may be subject to change in the future.