Risk and opportunity: Investment strategy update September 2014

Shaun Port

read 3 min

After the downward turn at the beginning of August, financial markets have staged something of a comeback. In the first six trading days of August global stock markets dipped around 4%, but bounced back strongly by the end of the month with the FTSE index coming close to its all-time high and the US equities market edging up to a new record. September has also got off to a good start, particularly in Europe.

Mitigating risks, exploiting opportunities
Investing is often characterised as an exploration: looking for new opportunities, finding unloved investments with cheap valuations, discovering the potential for high returns. At other times investing is about mitigating risk.

We believe a diversified portfolio is a great way to blend both opportunity and risk. Our biggest risk over the past few weeks has been the increasing possibility of a ‘Yes’ vote for Scottish independence, while our biggest opportunity has been low-priced German stocks. So, we’ve been making changes to customer portfolios to put them in the best possible shape to withstand any turbulence in the market.

Scottish referendum looms
The Scottish independence vote is very near (18th September 2014) and we’ve seen a pretty significant shift in the polls over the past few weeks. While there are still a number of unknowns and there is some doubt around how accurate the polls are giving the highly unusual nature of the vote, the latest polling data shows just how close the vote could be.

While we still expect a ‘No’ vote, the lead of the ‘No’ contingent in the opinion polls narrowed in early September to a point that it couldn’t be ignored. To us, this was a signal to make changes to portfolios, in order to provide some protection in the event of a ‘Yes’ vote, but also not adversely affect returns in the likelihood of a ‘No’.

We believe that financial markets have been complacent over both the possibility of a ‘Yes’ vote and also the implications of independence.

Based on the current data, we feel that a ‘Yes’ vote is not impossible and the implications could be quite severe. There would most likely be 18 months of difficult negotiations over key questions such as Scotland’s currency, its share of national debt, and how pension assets are divided. With overseas investors currently owning almost 50% of the UK stock market, we think that the uncertainty surrounding all this would lead to some selling of the UK market.

US offers a shelter
In the first week of September we cut our exposure to UK equities significantly, by between a quarter and one half of our holdings across different risk levels, investing the proceeds in US stocks.

Given that UK equities have not priced-in the possibility of a ‘Yes’ vote for the Scottish referendum, if the vote was against independence we would expect the UK to perform broadly in line with the US market. However, in the event of Scots voting in favour of independence, we would expect the UK market to fall quite sharply while the US market would be unaffected.

We’ve also deliberately increased the exposure to non-sterling currencies like the US dollar, given that sterling would weaken markedly on a pro-independence vote.

Cheaper German stocks beckon
Because of the crisis in the Ukraine, German stocks had underperformed other eurozone markets, and had become quite cheap. In August they were 10% cheaper than French stocks, which is quite unusual.

Recognising the potential for a good recovery, in mid-August we took the opportunity to sell holdings in UK property securities, which were up 13% for the year so far, and rotate this money into holdings in the DAX, the German stock market.

Since that decision was made, the DAX has outperformed the UK property investments by 5%, so we’re pleased with this result.

Overall, we’re happy with the way portfolios are shaping up at the moment. We remain cautious on bonds and we’re generally favouring stocks with a bias towards US, Europe and the Japanese stock markets.

About this update: This update was filmed in September 2014 and covers figures for the full month of August 2014 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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