What are Pembroke’s Plans for 2016 to Protect your Investments from Volatile Financial Markets
Investment markets had a tough year in 2015, with most asset classes showing negative returns from the start of the year.
Despite most of the world stock markets being down significantly since April 2015, all seven of our portfolios are well into positive territory. We are delighted to report that all of our portfolios have outperformed their respective industry benchmark – which is always our aim – with matching, or less, volatility. This means that your invested capital enjoys a smoother ‘ride’ from our selections than by being in the general financial market place.
Our unique Investment Committee approach to investment management has added significant value to our risk-rated, actively managed portfolios. Our ongoing service standards ensure that we continue to report to you each and every quarter and you can rest assured that our process is taken both seriously and professionally.
Your Investment Committee, as you know, comprises of 9 members who each have an equal vote and work by majority consensus. We strive to offer a culture that is open to challenge and free from hierarchy. We ensure that each member has direct responsibility in our process. Each Committee member oversees a specific market sector or asset class or, perhaps, a specialist portfolio. Every quarter they are responsible for conducting detailed research on their sector or portfolio, directed by our mutually agreed investment guidelines, thereafter presenting their findings at each meeting and this forms the basis of continued discussion and analysis. The sectors can, and have been, rotated to reflect the experience of the available Committee members.
We are constantly challenging the way we work to ensure that the portfolios work hardest for you in the difficult times.
We recently passed the 6th anniversary of our Wrap based Wealth Management service. Incredibly, there are now 1235 (October 2014, 906) clients who have enthusiastically adopted our investment and service proposition and, aggregated all together, they have entrusted us with over £152 million (October 2014, £105.5 million) of valuable capital.
Our ‘since launch’ Portfolio performance (31/07/2009 to 04/01/2016)
Performance 3 Year Volatility #
|Ethical & Environmental||+84.49||+66.29||+18.20||6.97||6.39|
|Income *(* Figures since launch February 2010, Income re-invested)||+48.56||+34.27||+14.29||5.18||5.53|
# Volatility is a measure of ‘investment risk’ – the larger the number the bigger the inherent risk. All returns quoted are gross and do not take charges into account. Portfolio benchmarks are detailed in each Quarterly Wrap report.
What’s ahead for the global economy and markets in 2016?
It is quite possible that the key events that will shape the global economy and markets in 2016 have already happened in the closing weeks of 2015.
December 2015 saw three meetings – by the European Central Bank (ECB), OPEC oil producers and finally the US Federal Reserve (Fed) – which between them have set the tone for global investors for the first part of 2016, and quite likely the rest of the year.
With the loosening in policy by the ECB followed by a first Fed rate rise only two weeks later, we had decisive confirmation that monetary policy on both sides of the Atlantic is on divergent paths.
Many developed central banks have tried to raise policy rates since the global financial crisis. None have been able to make that rate rise stick. In 2016, we find out whether the world’s most important central bank will be the first – and manage to follow that rate rise with a few more.
More important for investors than the exact timing of this first US monetary policy tightening is the pace of subsequent rate rises, which was a key focus on the day of the December move. The strength of US consumption and investment will be important in paving the way for continued gradual ‘normalisation’. But for investors it will also be important to watch the dollar and the price of oil.
That is where the OPEC meeting comes into the equation. World energy prices fell by around 12% in December, partly because the producers represented at that meeting had failed to agree any reduction in oil production. This further decline in the price of energy appears to be largely supply driven and should ultimately be positive for global consumption and growth. But as we learned in 2015, it also complicates the picture for central bank policy by pulling down inflation, and for investors via the effect on headline US corporate earnings. It has also caused problems for high yielding corporate debt.
We have become used to the theme of ‘divergence’, but the divergence that we saw in 2015 was multi-layered and is unlikely to go away any time soon. The world is divided by region and by sector, with developed economies doing better than emerging ones – and within each country, service sector businesses generally doing better than manufacturing.
This mixed picture explains why global growth was relatively weak in 2015 and is likely to remain so in 2016. But we do not expect a serious slowdown or recession, because we see decent supports for private consumption in developed markets going into 2016, including higher real wages, increased household borrowing and somewhat easier fiscal policy than in the recent past. This is especially true in the US and UK, where consumer spending looks set to rise by more than 2.5% in 2016, for the third consecutive year.
The Eurozone grew by around 1.5% in 2015 and could do slightly better in 2016, though much will depend on whether private investment finally starts to pick up. The most encouraging feature of the past 18 months has been the relative strength in the periphery of the Eurozone – notably Italy and Spain – and the pickup in domestic demand due to higher consumer confidence and the fall in the price of oil. Domestic demand rose 1.7% in the 12 months from October 2014, whereas net exports fell by more than 0.8%.
Japan has once again struggled to put years of intermittent growth behind it in 2015. The Bank of Japan (BoJ) has made progress in increasing inflation, but will not come close to reaching its target of 2% in 2016. Both employment and lending growth look healthy relative to the years since the global financial crisis and micro-economic data such as rapid jobs growth at small companies suggests that structural reforms in some sectors are having an effect. But though there are improvements in corporate governance in key parts of the market, ‘Abenomics’ clearly has a long way to go. Even if inflation does pick up in a lasting way, investors also do not yet have a convincing answer to the question of what happens to the country’s mountain of sovereign debt.
A key source of uncertainty in the outlook is China, which saw a significant slowdown in the core industrial side of its economy through 2015 and continues to have a significant disinflationary effect on the global economy. In effect, the industrial side of the economy has already had a ‘hard landing’, but services have been more resilient and account for a much larger share of GDP than a decade ago. China’s ongoing challenge is to manage this cyclical slowdown without undermining the structural move to a more consumer oriented economy, which would be good for global imbalances as well as being good for China.
That is why we have not seen the kind of emphatic fiscal and monetary response to economic weakness from the Chinese authorities that we saw in the global financial crisis. But the authorities have acted to support the economy with successive reductions in interest rates and reserve requirements for banks, along with an expansion in certain parts of the budget.
With its economy expected to grow 2.25%-2.5% again in 2016, the UK is clearly on the US side of the monetary policy divide and the Bank of England (BoE) much closer to rate increases than the ECB. But the BoE’s Monetary Policy Committee is in no rush to tighten. Though there has been a moderate pickup in wage growth in 2015, the exchange rate is a key consideration, and core inflation is still well below target. Faster productivity growth offers the prospect for real wages to pick up, without squeezing corporate profit margins or adding to domestic inflation.
Another potential argument for holding off rate increases in the first half of next year is the referendum on the UK’s membership of the EU, which the government would like to hold by the early summer and which could cause some volatility in sterling and other UK markets.
As mentioned above, the Chinese central bank is likely to be still in easing mode in 2016. Many central banks in the struggling emerging market (EM) economies will want to ease policy to revive growth and offset the negative effects of deleveraging. But any further round of capital outflows would clearly limit their room to do that and may even force them to raise rates to defend the currency.
It’s difficult to summarise the prospects for EM economies because conditions vary enormously and some – especially commodity importers such as India – are at a much later stage of adjustment than others. That’s why it is important to differentiate between them. We know that developments in China will be key to the outlook, because many EM countries are now more reliant on Chinese growth than demand from Europe or the US.
In an environment of solid but unexciting growth in the US and other developed economies and only gradual increases in US interest rates, we would conclude that it makes sense for us to weight the portfolios in favour of equities over core fixed income in 2016 – and developed market assets over emerging ones.
With the Eurozone less advanced in the economic cycle, we see scope for Europe to continue to outperform the US. Japan was the best-performing developed market in 2015. That looks less likely in 2016, especially if the BoJ decides that the economy is doing well enough to manage without further easing.
The fall in oil prices suggests that the UK may show a similar pattern to 2014 and 2015, with the index underperforming but large parts of the market doing quite well, especially sectors that are close to the domestic consumer.
The downside risks to concern us most are:-
- Another significant bout of dollar strength, due to missteps by the Fed or the ECB. The US currency usually strengthens in the lead up to higher rates, but once the tightening cycle is under way it has often turned. The consensus this time is that the dollar will continue to strengthen, at least in the first part of the year. This would be manageable, but another leap upwards could be damaging, not just for the balance of the US economy, but for broader global stability.
- greater than expected weakening in global growth due to further adjustment problems in emerging markets and the disinflationary forces coming out of China.
- Political risks are also a lurking concern, particularly the UK referendum on EU membership, the European migrant crisis and the general election in the US.
The best outcome for investors would be a stable or falling dollar over the course of the year, because this would suggest that the momentum of global growth had shifted outside the US.
At this stage we remain cautiously optimistic for 2016 and have therefore positioned the portfolios accordingly. We have taken, and will always take, medium to long term positions within our portfolios and maintain that diversification across a broad range of asset classes is the key to longer term outperformance.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.