2nd December 2015
Rowan Dartington Signature’s Guy Stephens looks at current and upcoming investment opportunities…
Last week reminded us how important and significant is the consumer and by extension, the voter, to the policy setting of our political system in the West. George Osborne delivered his Autumn Statement and Spending Review and it could have been confused with a pre-election giveaway, such was the nature of the soft landing for many voters, braced for more austerity. It is unfortunate that the opposition parties in Westminster are in such disarray because, as usual, the devil was in the detail. His U-turn on welfare benefits was delivered as a triumph of listening whereas there will still be an impact under the universal credit when that is introduced. However, whichever way it is viewed, it has come as a relief to many on low incomes.
The daylight between Miliband’s pre-election anti-austerity and Osborne’s now more relaxed austerity is much narrower as evidenced by the forecast percentages of debt to GDP over the next five years, where it barely moves below 80%. All the more reason to hope that UK interest rates don’t rise anytime soon, as this is still twice the level of borrowing that we should have. We tend to take most of the economic predictions at the despatch box with a heavy dose of salt because the inaccuracy of Her Majesty’s Treasury is almost as consistent as that from the Office for Budget Responsibility and the Bank of England. All three are trying to predict the unpredictable but there is some value in that these forecasts at least tell the investor what isn’t going to happen! It is the direction of travel which is most important and so the takeaways from Osborne’s statement were that he has more fiscal room for manoeuvre due to higher tax receipts supported by likely robust economic growth. This the markets liked and so, generally, we saw a positive reaction from the bond markets, sterling and equities.
The infrastructure and property spending will support job creation in the construction sector and will further support our overweight positions in commercial property which have been such a worthy alternative to overvalued fixed interest in the last two years. Fixed interest markets have confounded many from May 2013 when taper relief first upset the QE party. With many investors underweight, the key positioning has been where the underweight fixed interest allocation has been invested. If this has been in property related sectors and UK mid-caps, avoiding Emerging Markets, then performance should have been respectable. If it has been in flat-lining alternatives designed to not lose money such as cash, absolute return and large-cap equity income, then it is likely performance will have struggled.
The impact from the Chinese slowdown and its effect on periphery Emerging Markets and Asia-Pacific regions is still being felt and we are constantly asking ourselves, is it time to buy energy and commodities? This week’s results from Aberdeen Asset Management remind us that the pain from this Emerging Market cyclical evolution is not over with further weakness seen in commodities following bearish statements. This will be a key call for 2016 and beyond as the cycle will bottom out at some point and then being underweight will cost just as much as it has made going forward. The FTSE-100 could then go through that rare moment of outperforming its mid-cap and small-cap brethren, before adjusting for the extra risk.
This week sees a potential extension of QE in Europe on Thursday which many are predicting whether that be the extension of the timetable beyond next year, the breadth of the assets purchased or the actual amount being regularly purchased, currently €60bn a month. This will be a further shot in the arm for European equity markets. And then there is the OPEC meeting on Friday where nothing is expected in terms of adjustments to supply quotas. The mere whiff of a change of stance will cause a surge in energy stocks but currently, there are no expectations of any change. At some point there will be a shift, perhaps connected to Russia joining a unified foreign policy in the Middle East, but for now, all bets are off and oil prices remain at lows.