Six key investment themes for 201508 December 2014
Tilney Bestinvest’s Chief Investment Officer Gareth Lewis highlights the six themes likely to dominate investment strategy over the next twelve months
After the soaring asset markets of 2013, cracks in investor confidence began to emerge in 2014 as geo-political crisis took centre-stage including the violence in Ukraine and chaos across Iraq and Syria. Closer to home, the Scottish independence referendum set the cat amongst the pigeons and has focused investors increasingly on the political risks that lay ahead from an uncertain outcome in next May’s General Election and a potential referendum on the UK’s EU membership.
Speaking at a seminar in London today, Gareth Lewis, Chief Investment Officer at Tilney Bestinvest, which oversees £9 billion of assets, set out six themes that he believes will influence investment markets during 2015 and that are driving Tilney Bestinvest’s investment strategy.
1. This is still a banking crisis - Follow what the banks do not what they say
“While the initial casualties of banking sector insolvency have either recovered (in the US) or are recuperating (the UK), don’t be duped into thinking the banking crisis is over - far from it. Loan loss provisioning within the Eurozone remains inadequate and capital remains scarce. We view the recent European Central Bank asset quality review as a missed opportunity to highlight this and believe that the weak capital position of the European banking sector will condemn the Eurozone to deteriorating money supply as the banking sector continues to rebuild balance sheet through retained earnings.
“The fragility of the banking sector isn’t just confined to the struggling economies of the Eurozone. There are growing concerns that much of the capital allocated to the China growth story has been misallocated and that could spur a wave of loan losses, that will see the epicentre of crisis move from the west to the east.”
2. The failure of the Fed - The unintended consequences of QE3 have significantly damaged the recovery
“It is also clear that in maintaining its Quantitative Easing programme long after the US banks were effectively recapitalised, the US Federal Reserve has effectively trapped stimulus in the financial system. The major beneficiary of QE3 has been the corporate sector which has used cheap re-financing rates to boost share buy backs and special dividends. Low debt default rates have also prevented the expected increase in capital expenditure and investment that should normally drive economic activity. This suggests the corporate sector has become the main blockage in the monetary transmission mechanism.”
“The evidence that QE has benefitted the real economy is poor given the sheer scale of the endeavour. What it has done is inflated asset prices, driving both the S&P 500 Index of US equities and bond issues to record levels.
3. Expect Eurozone QE - But rising Eurozone funding rates
“The US recovery has been fueled by the support of three factors; extraordinary monetary policy (QE), fiscal forbearance and a recapitalised banking system. Thus far, the Eurozone has had none of these pre-conditions: the European Central Bank (ECB) has avoided implementing a politically-charged QE programme, fiscal policy has been tight and disjointed across the region and we believe the European banking system remains materially under-capitalised. Against this backdrop, and with a worryingly weak growth and inflation outlook, it seems inevitable that some sort of QE-like programme will be launched in Europe, which could be positive for equities but may see borrowing rates actually increase from here” said Lewis.
4 Yuan devaluation - Chinese economic slowdown will force a competitive devaluation
“Chinese capital continues to be allocated to state owned enterprises over owner managed businesses which is creating a disjointed and increasingly unstable economy. The country’s excessive debt consumption linked to local government infrastructure investment is in danger of unraveling. The weak global economy and reduced competiveness suggests that authorities may be forced to devalue the Yuan.”
5 Secular stagnation and the risk of “lowflation” - Oil price weakness is just one symptom of weaker world growth
Secular stagnation is a condition of negligible or no economic growth in a market-based economy. We believe that many of the current conditions of the world economy show signs of secular stagnation. While QE has increased the wealth of the few – increasing the developed world savings rate - this is to the detriment of investment. Only the inappropriate and excessive debt fueled Chinese investment cycle has kept world growth afloat. Weak commodity prices and the collapse in the price of oil are symptoms of this phenomenon. The consequence will be lower terminal interest rates (the “new normal”), weak inflation and lower for longer bond yields.
6 Follow central bank liquidity not economic activity - In a world of low growth monetary stimulus will be the major driver of asset returns
“We believe that the growing divergence between central bank policies will be the key determinant of asset price performance. QE cessation in the US, allied to modestly rising interest rates and high valuations will prove a challenge for US equities. Japanese QE will continue to support equity prices. Eurozone QE is now widely discounted reducing the immediate impact but, if linked with looser German fiscal policy, could drive Eurozone equities sharply higher. Chinese stimulus will sustain mainland Chinese equities, but do little to alleviate structural economic issues. We expect the Dollar to remain strong against most major currencies with Yen, Euro and Yuan all likely to devalue.”
“In conclusion, we go into 2015 cautious on US and Emerging market equities, neutral on the UK but positive on Europe and Japan with an important caveat; you need to hedge the currency risk for the Yen and the Euro, ideally into US Dollars but failing that, into sterling. We are strongly negative on commodities and have zero weighting in managed portfolios. In bonds, we are structurally overweight on high yield, and are more constructive on investment grade, although we remain underweight relative to our long term neutral position.”
- ENDS –
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested.
Past performance is not a guide to future performance. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.
Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing. We aim to provide investors with information to help them make their own investment decisions although this should not be construed as advice or an investment recommendation. If you are unsure about the suitability of an investment or if you need advice on your specific requirements, we strongly suggest that you consider professional financial advice.
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About Tilney Bestinvest
Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.
We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.
We have won numerous awards including UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.
Headquartered in Mayfair, London, Tilney Bestinvest employs almost 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.
The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.
For further information, please visit: www.tilneybestinvest.co.uk
Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.
We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.
Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.