Investment strategy update November 2014: markets looking up amid shocks and stimulus

Shaun Port

read 3 min

October turned out to be a bumpy month for global markets, but ultimately ended up with many markets recovering a good part of their losses.

Global stock markets have experienced a pronounced sell off, known as a ‘correction’, in each year of the last five years, but that hasn’t stopped upward progress. This time around, global equities fell by around 8% from mid-September to mid-October, with some developed stock markets down by as much 15%. These are similar losses to what we have seen in recent years.

Our longer-term view of the global economy hasn’t materially changed, so we decided not to react to market losses and change the amount we hold in equities. A correction of this magnitude is fairly normal and sometimes reacting to market falls can be one of the worst things you could do. Selling in a falling stock market is easy, but buying back is much harder – often you buy back when the market is well above the level you sold at. Rather, it’s best to look ahead, and try to ride out the volatility as best as possible.

Japanese rally

We’ve been holding a reasonable amount in Japanese stocks this year because we believe that the government is likely to stimulate the economy. Until recently the performance has been disappointing, one of the worst performers in global stock markets, however, our patience has been rewarded.

At the end of October the Bank of Japan (BoJ) announced steps to increase its bond buying program significantly and raise the amount of exchange-traded funds it buys each month.

To put the scale of this decision into context, the amount the BoJ is planning to inject into the economy is similar to that of the US bond-buying program, despite the fact that the Japanese economy is about a third of the size of the US.  Added to which the main government pension scheme is doubling its investment in Japanese stocks. This is very significant: the stock market gained 7% in three days and we expect further gains.

Europe – recovery still sluggish

Europe continues to disappoint. Ireland and Spain continue to recover, while France and Germany are doing poorly.

However, we are seeing some positive signals, such as the vast majority of European banks passing stress tests to see how they would stand up to another crisis. The demand for lending is also picking up again.

There are also signs of economic reform in Italy and France, even if they are small steps. Similar to Japan, European governments and the European Central Bank will have to do more to stimulate growth, which will help share prices.

Closer to home, we hold a much lower amount of UK big companies – the FTSE 100 – than usual. UK returns have been disappointing – lagging the US market, although admittedly a bit better than Europe.

Looking forward to the end of 2014

It’s a great sign that global markets have recovered a lot of the ground lost from a troubled two months.

Often a market ‘correction’ can be quite healthy, setting markets up for the next upward move.

While parts of the global economy still look fragile, many companies are now reporting strong results. We are entering what has historically been a more positive part of the year for stocks, nevertheless, we expect markets to remain volatile – not least because a collapsing oil price is worrying some investors.

Longer term we still expect to see good gains from global bond and equity markets and, as a result of all this, over the past month we have made no changes to Nutmeg portfolios.


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


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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