Nutmeg investor update: February 2018

Shaun Port

read 3 min

It’s been an eventful start to 2018, equity markets had some really strong gains in the first three weeks of the year, but a sell-off of government bonds has resulted in a sharp decline across global stock markets in late January and early February.

It’s been an eventful start to 2018. Global equity markets had some really strong gains in the first three weeks of January, but lost some of these gains towards the end of the month. In bond markets, UK government bonds lost nearly 2%, which is quite a big loss for bonds. And for currencies, the US Dollar has been very weak, which meant the pound rose by almost 5%. As a result of a strong pound, UK equities underperformed other developed markets, with the FTSE 100 producing a loss of 2% whereas global equity markets gained over 5%.

The global economy performing well at the start of the year has resulted in some investors starting to worry. We would expect a strong global economy to cause inflation to rise and, as a result, interest rates could increase more quickly than many investors had assumed.

If we look more recently to the start of February, we have seen a sell-off in bonds, which has in turn caused a sharp correction in global stock markets. This follows a period of unusually low equity market volatility. Experienced investors won’t be surprised by the market reaction to what is, in historical terms, a minor sell-off in bonds.

How did Nutmeg portfolios perform in January?

In January, our lower risk portfolios made a small loss and our higher risk portfolios made a gain of around 1%. This performance is against a backdrop of UK equities and government bonds both losing 2% in the month of January.

Holdings in the US and emerging market equities performed well and as we have hedged some of our overseas currency exposure, portfolios didn’t feel the full brunt of the large appreciation in the pound.

Changes to fully managed portfolios

We haven’t made any changes to the Nutmeg portfolios so far this year. Our portfolios are currently positioned for the global economy to perform well and that’s why we’re very cautious in the way that we are managing bond holdings, as well as holding larger than normal positions in emerging markets and Japan.

We are continuing to monitor developments in the markets, particularly focused on how much risk we are taking in portfolios. If our view changes, especially concerning the outlook for economic growth and inflation, we will make changes accordingly.

Customer question

Our customer question comes from Josh via Twitter, and he’s asked “Recognising the UK economy is turbulent and not the strongest globally, why is so much of Nutmeg’s portfolio UK-weighted?”

This is a really great question. The first thing to say is that when you invest overseas you are taking on currency exposure, which generally means more risk. In addition, when you own UK assets, you are also owning exposure to the global economy rather than just the UK economy.

If we look at the example of the FTSE100, around 70% of revenues come from the global economy not the UK economy. Similarly, UK government bonds largely follow movements in US and European bonds closely. So, owning UK assets gives you exposure to the global markets without the currency exposure.

The second thing to say, is that in our portfolios at the moment, we are underweight in UK assets compared to what we would normally hold. This is as a result of the relatively poor outlook for the UK economy, the ongoing uncertainty around Brexit and our expectation that the pound will recover some of the ground lost after the referendum.

About this update:

This update was filmed on 5th February 2018 and covers figures for the full month of January 2018 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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