May was a really busy month, with lots going on in Europe and further afield. Political risk was firmly back on the agenda, as turmoil in Italy and Spain may set a tone of caution for the rest of the year.
What’s been going on in Europe?
It’s taken three months for an Italian coalition government to form, with some quite unlikely coalition partners coming together. There’s the Five Star party, which is considered quite far-left, joining forces with the League, which is considered far-right. The new coalition was sworn in on 1st June, and intends to bring in populist political policies including higher government spending and lower taxes.
The process of forming a coalition almost caused a constitutional crisis, particularly when the proposed finance minister, who is known to have anti-EU views, was vetoed by the Italian president. Since then, a different finance minister has been appointed, which has calmed the situation somewhat.
Unsurprisingly, political uncertainty in Italy was something the markets have had to digest, resulting in a sharp fall in the prices of Italian bonds and, more broadly, lower European stock prices. We still consider Italian politics to be a significant risk for European markets this year, given the potential for friction with the European Union to undermine confidence in the euro.
In Spain, Prime Minister Rajoy lost a confidence vote and the government collapsed, leaving space for the new prime minister to try and form a minority government. Again, this puts political risk firmly on the agenda in Europe.
And what’s going on further afield?
President Trump continues to comment on tariffs and trade policies. However, the impact has been less significant, in part because China’s tone has been more conciliatory. For example, China has responded with proposed measures to cut tariffs on car imports. We think the nature of Trump’s comments will continue to upset markets to an extent, but the impact has not been too significant yet.
Emerging markets have been going through an eventful period too. In Turkey, President Erdogan has threatened the independence of the central bank, and this has caused quite a sharp dip in the Lira. Argentina continues to wrestle with a currency crisis, while Brazil has been suffering from a very widespread strike by truck drivers that’s threatening the whole economy. Brazil’s stock market fell by 10% in May and the currency by 6%. We’re continuing to monitor developments in these emerging markets closely.
How did Nutmeg portfolios perform in May?
The portfolios performed well last month, with gains ranging from around 0.4% for our low risk portfolios up to 1.6% for the highest risk portfolios. Most of the gains were realised early in the month, with the second part of the month proving to be more muted.
In particular, gains came from UK and US stocks, with Europe, Japan, and emerging markets acting as a drag on returns. Bonds generally delivered a positive return.
Have you made any changes to the fully managed portfolios?
We sold our exposure to Swiss equities and bought UK equities. Swiss and UK equity markets tend to perform quite similarly, but we wanted to take this opportunity to increase exposure to commodity companies by adding to UK stocks.
Customer question
This month our customer question comes from Phil Hadfield on Facebook, and he asks “What makes a great pension pot?”
Thanks Phil, this is a great question. One of the most important things is to start early. Remember that the longer you have your money in the markets, the greater the potential to benefit from returns and compounding over a longer period.
From a behavioural perspective, if you get a pay rise, it’s a good idea to increase the amount you contribute as a proportion of your salary if possible.
Tax relief and employer contributions can also enhance your pension without cost to you, and combining this with a quality investment service can really pay off over the long term.
About this update
This update was filmed on 4th June 2018 and covers figures for the full month of May 2018 unless otherwise stated. Data source: Bloomberg
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 performance and forecasts are not reliable indicators 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
