May was a fairly volatile month in financial markets but overall Nutmeg portfolios made small positive gains. Our typical medium risk portfolios gained just under 1% and higher risk portfolios just over 1%.
An overview of financial markets in May
Financial markets were relatively weak at the start and end of the month, but there were some strong increases in the middle of the month. Bonds made small gains during the period.
Coming into the start of June we have seen some small losses in stock markets. This is due to concerns over the situation in Greece where they have yet to find agreement with the eurozone partners on a financial bail-out.
What changes have you made to customer portfolios?
We’ve decided to make no changes to customer portfolios this month. We’re happy with the shape portfolios are in – that is, cautious on bonds, which is an approach that has been working well, lots of exposure to Japanese equities, which has been one of the best markets lately having delivered gain for five months in a row, and substantial investment in Europe.
The European component has been more complex lately because of Greece but we still believe European markets represent a good long-term opportunity and events in Greece shouldn’t derail that.
Can you explain what is happening in Greece?
Greece elected to miss its 5th June €300m payment to the International Monetary Fund (IMF) and instead bundled payments into a €1.6bn lump sum on 30th June. Countries are allowed to do this for payments within the month but it is a real rarity – the only other time it’s happened was Zambia in the mid-1980s.
It is believed Greece’s cash reserves are close to exhausted, although it appears Greece could have made the payment if it wanted to. This has led to further speculation that Greece may exit the euro, which could have a negative effect on many stock markets in Europe.
We still expect Greece to remain in the euro and a resolution to be found, with the strong possibility that the government puts the bailout conditions to the Greek nation in a referendum or general election. That said, the investment journey could be bumpy until this is all resolved.
What other investment areas are you focused on right now?
As ever we look at the current positioning of our customer portfolios but also consider the patterns that may emerge over the coming months and even years. We find it useful to think in terms of cycles for markets – such as the economic cycle and the interest rate cycle. These two can have big impacts on market returns for different types of investments.
With that in mind, we’ve been spending a lot of research time on China and broad emerging markets. We believe growth in the Chinese economy is far weaker than the official statistics are reporting and a big downturn in Chinese equities could hit stock prices in the UK and the US.
We have also seen a big deterioration in growth across emerging market stocks this year. Exports are falling at the fastest rate since the financial crisis in 2008, which we attribute to weak China demand and low commodity prices.
While these may not appear to be good investment opportunities on the surface, emerging markets and currencies are quite cheap at the moment. This means there may be opportunities to benefit from an economic recovery in emerging markets and higher stock prices in the future. We can’t see that happening in the next few months but as we look long term it is something we will be closely monitoring.
What are your views on currencies and currency hedging?
It’s important to consider possible currency movements when managing portfolios, so we always look at the currency implication of owning any non-sterling investments.
For low risk portfolios we would tend to try to eliminate much of any potential currency movements, whereas for medium and higher risk portfolios we tolerate more currency impact and so have much more non-sterling exposure.
But, when we have a negative view on a currency – or in fact no view – we are likely to buy funds which hedge currency exposure. In other words, we will take out some or all of the foreign currency risk. It can cost a bit more to invest in this way but it is often worth it for the better net returns you might get back.
About this update: This update was filmed on 4th June 2015 and covers figures for the full month of May 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.
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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