7th January 2016
Rowan Dartington Signature’s Guy Stephens highlights why investors should not be too pessimistic this year despite the turmoil in China…
Happy New Year from the markets…not!
Sound bites looking forward into 2016 appear to be very much on the bearish case citing weak Chinese manufacturing data, renewed Middle Eastern religious conflict and some GDP downgrades.
So much for a more positive outlook for the year, and that is before we start fretting about the next US interest rate rise. Maybe that one will have emerged by the end of the week.
If you asked investors about their thoughts regarding the investment climate of 2015, most would be disparaging and express disappointment.
However, it is important to examine the facts and the detail before believing in a negative outlook as reflected by recent media coverage.
It is also important not to be swayed too much by the views of those fund managers who invest defensively or use alternatives extensively in their processes.
It is in their interests to promote a negative macro view as they are in the business of gathering assets and attracting more risk-averse investors – no wonder that most of the highest profile managers in these areas are always bearish from a macro perspective.
Looking at the performance data for 2015, we all know that anything oil-related was battered and this was a big influence on the published numbers for the FTSE-100 due to the exposure to the sector.
We also know all about the commodities rout due to the on-going fall in demand from China but more influentially, the massive expansion in supply from five years ago when Chinese demand was at its highest.
This is typical commodity super-cycle behaviour and probably has further to play out.
There have not been enough casualties and with renewed tension between Saudi Arabia and Iran, interaction around the OPEC table is unlikely to be constructive with the next meeting due on 2nd June 2016.
Therefore, expect the oil price to remain low with respect to oversupply, but who knows just how far the Sunni/Shia sensitivities will go as they spread throughout the region.
Quoting the numbers in sterling without income, the FTSE-100 was down by -4.93% but with income reinvested this improves to a loss of -1.32%. You would think this had been a disaster and when you consider the three-year numbers with the effect of compounding and inclusive of income, the results belie the gloom being 5.84% capital only and 17.96% inclusive of income.
The former is a pretty derisory return over three years but the latter is not, and this exposes the flawed focus on the absolute level of the major indices, which leads to a disappointed and disillusioned investor mind-set.
In 2015, of the major asset classes that we categorise, Japan, FTSE Mid Cap and FTSE Small Cap offered double digit returns but only FTSE Mid-Cap will realistically have a substantial weighting in our portfolios.
All other major overseas areas offered superior returns to the FTSE-100 with the exception of Emerging Markets due to the influence of China, neighbouring economies and economies reliant on commodity and oil exports.
The best of these outside Japan was the US and if the investor, or his appointed investment manager, managed to avoid the energy sectors of the FTSE-100, he would have enjoyed reasonable returns.
Over three years, inclusive of income, the S&P 500 has returned over 68% followed by the FTSE Mid Cap which has returned over 52%. Fortunately, these are areas to which we have been significantly exposed and so we have performed well and for the time being, although no longer good value, we are not yet minded to take the plunge into the bombed out areas.
Interestingly, most investors have been bearish on Gilts, and we have been no exception. Capital-only returns over three years have delivered -0.73% whilst with income this rises to 9.99%, which is more respectable but with interest rates now on the move, this remains as unattractive as ever.
So we remain keen on equities with some large caveats regarding uninvestable areas where the risk/reward remains unattractive.
However, what we do know is that at some point the oil and commodity cycle will turn and take with it the very same influential sectors which have dragged down the relative FTSE-100 performance.
With the FTSE-100 flirting with 6,000 once more and the index yielding 4% net, for those with cash and at least a three-year horizon, it feels like an attractive entry point.
In addition, it also feels brave and laced with nervous caveats and that usually means it will be profitable.