December was a strong month for Nutmeg portfolios, and for stock markets generally.
Driving Nutmeg’s strong returns was the UK equity market. That was supported by good performance in government bonds through December, contrasting with disappointing bond returns in recent months. Most of the holdings in Nutmeg’s portfolios performed well.
The main exception was gold, which came under some pressure. On the whole, we saw returns of up to just over 3% through December — so a really good month.
The causes of strong market performance
Equity markets have rallied in response to policies that investors expect Donald Trump to implement when he takes office.
But UK equity markets have also been driven up for another reason – the weakness of sterling. Counter-intuitively, the weak pound supports many larger UK companies, because they make their money abroad. When sterling dips, their foreign earnings are worth more in British pounds, so their profits rise.
Indeed, the FTSE 100 – the main index of large UK companies – has hit several all-time highs this December.
What market highs means for us
Obviously, on the face of it, this is great news. Strong market performance has helped Nutmeg portfolios to rise.
Is it something to worry about when markets hit all-time-highs? Generally, no: all-time-highs are a natural feature of markets rising. In fact, when you look back at the last 30 years, the FTSE 100 has spent around 40% of its time at or within 5% of an all-time-high.
We don’t believe there’s cause for concern in December’s market highs, and we expect the market to carry on performing well.
The outlook for sterling — and what it means for Nutmeg portfolios
Sterling’s fall is bad news for importers, or closer to home, anybody planning to take a summer holiday abroad.
But sterling weakness isn’t such a problem for Nutmeg portfolios. Most importantly, it’s helpful for the holdings we have in overseas assets including US equities and our holdings in Japan.
Additionally, as mentioned above, it helps companies that earn their income in foreign currencies, which are now strong relative to the pound. Admittedly, if you look at current UK stocks prices in relation to company earnings over the last 12 months, UK stocks look somewhat expensive. But taking into account higher predicted earnings in the months ahead, UK stocks now look reasonably good value. That’s why we continue to hold them.
Donald Trump’s inauguration
Investors have probably priced in the measures they expect Donald Trump to make by now, so we don’t expect the inauguration to have any significant impact.
There are three areas the administration is likely to focus on that investors will be watching closely. Firstly, many investors expect to see Mr Trump rolling back regulation, including in finance. Secondly, many expect tax cuts, in particular for businesses. Thirdly, they expect higher government spending, including on infrastructure.
Of course, some of these policies will be easier and quicker to implement than others. Perhaps the fastest to implement (and the most helpful in increasing company earnings and therefore buoying US stock markets) would be business tax cuts – so look out for those.
The negatives of Mr Trump from an investment perspective are harder to predict, but they relate to protectionism, reduced trade, and relationships with countries like China. So far, markets have focused mainly on the positives, but we will keep a close eye on these and other political risks arising from the Trump White House.
About this update: This update was filmed on 10th January 2017 and covers figures for the full month of December 2016 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.
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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
