Investment strategy update November 2013

Shaun Port

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Political activity in the US continued to dominate the headlines last month. The government shutdown certainly hit the markets initially, but this has led many investors to believe the US will not ease its bond-buying program – known as ‘tapering’ – any time soon. As a result, the markets subsequently had a bit of a boost. We’ve seen equity and bond markets experience good growth recently. For instance, the FTSE 100 index gained 4.2% in October.

Many analysts are now forecasting a tapering of the US bond-buying in the second half of 2014. However, we think there are strong signs it could well come sooner. The Federal Reserve doesn’t appear to be overly concerned with any impacts from the recent political upheaval and there are early indications that the US economy is bouncing back.

Furthermore, if we look at market prices as an indicator of future interest rates, the market has now completely erased any prediction of higher interest rates before 2015. In effect, it’s as if the Federal Reserve had never mentioned tapering at all back in May.

Finishing the year on the up        

Developed stock markets, particularly in the US, have performed well this year and, normally, we’d like to see a pause for breath. But, it looks like we’ll end 2013 with a positive inflow into US stock market funds. It’s the first time we’ll have witnessed this since 2007, after which the financial crisis took hold and we saw investors selling equities and buying bonds instead.

This time of the year has historically been good for equities. Since the late 1920s, when US stocks have grown by more than 10% by this time of the year, the final two months have given a return of nearly 5% on average. Of course, you can’t rely on seasonal trends, but we do know that a lot of new money flows into the market around December and particularly January, which is the best month for UK stocks.

Finally, we do not think that equity markets are particularly expensive right now, given the current growth in developed economies.

The outlook for emerging markets

Emerging market equities are cheap relative to their recent history, but we are not convinced this is the time to buy. The emerging markets regarded as fragile – notably Brazil, India, Indonesia, South Africa and Turkey – have now recovered about half of the losses they experienced in August and September. But with US tapering back on the menu, we think this recovery could prove short-lived.

The only emerging market equity investment we currently have in Nutmeg portfolios is in South Korea, which together with low valuations, represents something of a safe-haven in emerging markets.

Overall, we still prefer to hold more equities from continental Europe than in emerging markets and this month we increased our holdings in Italian equities. Despite an unstable political situation and a sluggish economy in Italy, the stocks look overly cheap and we think they represent more value than many emerging markets.

Other changes to Nutmeg customer portfolios

Again, with US tapering in mind, we’ve decided to scale back on global property, which has mainly US holdings, but kept UK property stocks.

Based on an improving European economy, we have continued to add to our equity holdings on the continent.

And finally, on bonds we remain quite cautious.  We expect bonds to do quite a bit better than cash, but we still think it is right to sit tight as we carefully monitor further changes in the US.

About this update:  This update was filmed in November 2013 and covers figures for the full month of October unless otherwise stated. Data sources: Bloomberg; Nutmeg calculations based on monthly S&P 500 return data over 1928-2013 from 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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