Happy new year and welcome to the first investment update of 2016.
The first couple of weeks of 2016 have continued to be quite volatile in markets. The driving force behind most of this is changes in China’s economic policy.
In the first week of the new year, China’s stock market took a couple of dips, meaning ‘circuit breakers’ built into its stock markets were triggered. These limits meant that a -5% decline in markets from the previous day’s closing level results in a 15 minute halt in trading. If that decline reached -7%, trading closed for the day.
On Monday 4th January, the 15 minute halt was lifted after a sell-off triggered the first -5% limit, only for the second breaker to be triggered seven minutes later. On Thursday 7th January this happened again, however the -7% barrier was breached in just 2 minutes, signalling a close of day within just 30 minutes of trading – China’s shortest trading day ever.
The reason behind all of this is that China has made changes to its monetary and currency policy in an effort to steer the economy away from a low wage, manufacturing economy and towards a higher wage services-led economy.
This ‘maturing’ of the economy is causing some growing pains. Investors don’t really understand the moves that the Chinese government are making and data coming from China is often vague and open to interpretation. Because China is the world’s second largest economy, these issues have inevitably caused some ripples globally. For more information, read my full commentary on China’s stock market.
How does this affect Nutmeg’s portfolios?
Our customer portfolios have no direct exposure to Chinese stocks or bonds, however the knock-on effect in other markets (those which export to China, for example) is causing some volatility.
Despite this, we still see the wider global economic outlook for 2016 as positive. We think economies such as the USA and continental Europe still have excellent potential for good returns this year and over a three to five year outlook.
We’ve recently released our performance figures over the past three years and we’re really pleased to have achieved good returns for our customers over that time. Investing is all about considering a long-term outlook and this kind of short-term volatility will always play a part.
Recent changes to portfolios
We made some changes to portfolios back in December, and recently we’ve made some further alterations to take profits in some areas where currency movements have been helpful to returns over the past six weeks.
We’ve continued to move some of our US equity holdings in parts of the market that are cheaper and more defensive, known as ‘value’ stocks. Also, we’ve sold our holdings in riskier European bond markets and are currently holding slightly more cash than usual.
Our holdings in European and Japanese stocks are still higher than normal as we favour these markets over the coming year.
About this update: This update was filmed on Wednesday 13th January 2016 and figures cover the whole month of December 2015 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.
Other blogs you might like:
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.Other posts by Shaun Port