Political events had a big impact on markets in April. Studying how developments in political trends across the world will impact market returns remains a key factor in our Nutmeg investment strategy.
Political risk is often a factor that should be considered when making investment decisions but recently there’s been a barrage of very high-profile political events shaping financial markets. We’ve had the first round of the French Presidential Election, escalating tensions between the US and North Korea, and of course the announcement of a snap UK Election and its implications for the forthcoming Brexit talks.
Global politics at play
There was a strong rally in European equities following the early victory for Emmanuel Macron, which was widely seen as good news for stock investors.
Meanwhile, in the UK, most investment analysts are forecasting a large majority win for the Conservatives, which is perceived to give Theresa May more room to negotiate a softer Brexit. This is largely why the pound bounced back strongly in April, rising 1.6% against the euro and up 3.5% against the US dollar.
The stronger pound led to a 1.3% fall in the FTSE 100, the UK’s primary stock market index. It sounds a little counter-intuitive but a lot of big companies on the FTSE 100 generate most of their sales abroad. As they convert those international sales into sterling, their profits look better when the pound is weak. As the pound strengthens, the value of those overseas profits goes down.
A month of ups and downs
Over the month as a whole we saw losses of up to 0.9% on Nutmeg portfolios, which isn’t surprising given the downturn in UK stocks. Within that, some weeks were up while some were down. In one short four-day period the FTSE 100 lost 3.4%.
We welcomed a lot of new customers to Nutmeg in April. If you’re one of them, the early performance you’ll see in your account will very much depend on the exact date you invested. If you happened to catch that large one-week decline, don’t worry. Such falls are quite normal and tend to iron out over time. In fact, based on historical data, we would expect to see a one-week fall of at least that magnitude in equity markets around three times a year.
Strategic adjustments to Nutmeg portfolios
As always, we are focusing on the outlook for financial market returns. Over recent weeks we have reduced the exposure to UK equities in Nutmeg portfolios. This is in part because we believe that the UK is moving towards a softer Brexit process which means that the pound is unlikely to fall significantly from here. Though I must stress we don’t believe the pound will revert to levels seen before the Brexit vote any time soon.
We have also invested a little more in emerging markets and we’ve adopted an even more conservative approach to the way we manage bonds – reducing the amount of bonds we hold and also their maturity. As markets start to price in more of a soft Brexit, UK government bonds (gilts) will look much too expensive.
Lifetime ISA portfolios
I’d like to end this month’s round-up by answering an excellent question from one of our customers. Simon asked us if we build portfolios differently for our Lifetime ISA.
In short, no, we haven’t seen any need to change our investment strategy for the Nutmeg Lifetime ISA. Our investment principles and best practice remain the same whether you’re investing in a Nutmeg Lifetime ISA, normal ISA, personal pension or general portfolio.
However, it’s important to consider how long you expect to invest in a Lifetime ISA. We design and manage portfolios around how much risk you want to take and your investment timeframe. As a general rule, a shorter timeframe may indicate that you take less risk while a longer timeframe could suggest a higher level of permissible risk, since you have more time to ride out the troughs in markets and benefit from the peaks. When you invest, we recommend a minimum timeframe of three years.
About this update
This update was filmed on 3rd May 2017 and covers figures for the full month of April 2017 unless otherwise stated. Source data: Macrobond AB
Risk warning
As with all investing, your capital is at risk. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek independent financial advice. Past performance is 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
