First Quarter 2016
As At 31st March 2016
Much of the gloom hanging over investors initially concerned commodity prices. The fear was that the collapse in oil prices was a symptom of waning global demand and a sign that economic growth was falling to recessionary levels. This would hit profits and share prices across many companies. We feel this fear is misplaced; while we use oil less intensively than before, demand continues to rise at somewhere over one per cent per annum.
Rather, the issue of falling oil prices is simply that supply levels have swamped demand. State petroleum companies and the big listed oil firms went on a spending binge on the back of strong prices from 2010, with the result that production grew well above demand. This bubble burst in 2014 and has been deflating since – private oil companies have cut hundreds of billions of dollars from their spending plans, so supply growth should start to ease on this front.
After their worst start to the year since the financial crisis – with markets down nearly 12% at one point – it seems incredible that global equities ended the quarter up 2.8%, reflecting sterling weakness.
Investors have also been concerned about a slowing China and the ramifications this has for the global economy. China has been overly reliant on capital spending and manufacturing for economic growth in recent years, and the slowdown is part of an inevitable process to rebalance to more domestic spending and services. More recently, actions by the authorities to stimulate the economy have eased concerns about recession, and helped support the turnaround in investor risk appetite we witnessed from mid February. Our investment approach is that we favour well-established, structural growth stories which have exposure to the growing middle class in China and beyond. Often these are UK-listed stocks, as our market benefits from considerable revenue from outside the UK (around 70% for companies in the FTSE 100).
By the time you receive your next quarterly investment report, the outcome of the referendum on ‘Brexit’ will be known. Markets don’t like this uncertainty, and sterling has fallen sharply. This helps many of our holdings as it makes British companies more competitive overseas, though the domestic economy will be slightly weaker as companies delay spending ahead of the vote. Do we change portfolios in anticipation of the result? Telephone polls and betting intentions suggest that a ‘Remain’ vote is more likely; however, we clearly can’t predict the outcome and nor can anyone else. Trying to time market positions in advance is extremely tricky and we stick with our long-term investment strategy and horizon.
While we in the UK might feel nervous about the value of sterling or the local economy, there are plenty of global political and economic influences, both positive and negative, which have the power to affect us.