In June we saw the value of UK investments fall by around 1% across the board, both in equities and bonds. And while overseas markets made some gains, a rise in the pound offset those returns, leaving most UK portfolios slightly down for the month. That said, there are specific reasons behind this recent performance in UK markets and we still see UK and US equities as a significant part of our long-term investment strategy.
In the first half of 2014, the performance of the UK stock market ranked 39th out of the 46 global markets that we track. UK equities have certainly been subdued this year but there are a number of factors at play here.
Firstly, the base rate was generally not expected to rise until 2015. Bank of England officials have been deliberating over when rates should go up, but a hike is now generally expected before the end of the year. Such debate will always add uncertainty and a degree of volatility to market valuations.
Secondly, the UK stock market has a high exposure to mining and energy stocks (which are reliant on emerging markets and have performed relatively poorly of late) and comparatively little exposure to sectors like technology (which have been quite strong recently). This is different to the US stock market where there is more of a bias towards technology stocks and as a result we have seen strong gains in the US in recent weeks.
Long-term UK prospects remain positive
We believe the UK economy is in a healthy state and is well positioned for continued strong growth. Forecasts for economic growth in the UK this year have steadily risen to 3%, which is roughly double the figure predicted 12 months ago. And even if interest rates do go up this year – which would increase mortgage bills, having a negative impact on consumer spending and economic growth – we believe the strength of employment growth in the UK will largely offset this.
A strong pound
Over June, the pound gained 2% against the dollar and in the final week of the month it rallied above $1.70 – the highest level we have seen since the credit crunch and a clear sign that the UK is truly exiting the financial crisis. There are some concerns about the risk of Scottish independence hitting the currency, but we believe that overall economic strength is more significant.
Measured across a broad group of currencies, sterling is about 12% below the level we saw in the ten years before the financial crisis. So we think there is still much potential for the pound to gain further from here – good news for your summer holidays but not so good for some of your overseas investments.
Trends in the US and China
Over the past week we have seen some incredibly strong data from the US, where the economy has taken some time to recover from a very harsh winter. Housing is bouncing back, car sales have jumped, new orders are rising and employment growth is very strong. This is good news for stock markets.
Elsewhere, we think there are early indications that the slowdown in the Chinese economy is coming to an end. That’s not to say that we expect a sharp rebound in Chinese growth but that expectations have adjusted to the difficult outlook for the world’s second-largest economy.
By design, our portfolios have been structured to reflect the relative weakness of China. However, now that global investors are generally holding minimal exposure to China, any small uplift could see a comparatively good rise in prices, so we think it is prudent to consider investments that will benefit from some better news on China.
Changes to Nutmeg portfolios
We have looked at a variety of ways of slightly shifting our position on China across Nutmeg portfolios. For example, buying domestic Chinese stocks, holding equities in Asia and Australian stocks, or even a direct investment in energy and metals. But we think one of the simplest ways to do this is to own more large UK companies. The FTSE 100 is a relatively cheap market and it has a bias towards mining and energy stocks, as well as banks with high exposure to Asia.
As a result of recent sterling movements, we have moved the majority of our investments in US equities into a fund which minimises currency movements – what is known as a ‘currency hedged’ fund. We also did this last year when sterling rallied from $1.48 to $1.63.
Following good gains in European stocks we have decided to sell some of those holdings and secure the profits for our customers and, as well as adding to UK holdings, we have added a small amount to US stocks, since we believe that an improving global economy will push US stocks higher.
About this update: This update was filmed in July 2014 and covers figures for the full month of June 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.