Investment Comment - December 2014 Investment Team Richard Whitehead CEO [email protected] Matthew Butcher Investment Director [email protected] Alexander George Investment Analyst [email protected] Ben Klein Senior Investment Manager [email protected] Louise Chesters Senior Investment Manager [email protected] Chris Bellchambers Investment Manager [email protected] Contact us: Matthew Wille [email protected] Dart Capital 4 Eastcheap London EC3M 1AE Tel: 020 7283 1117 Fax: 020 7283 0891 Registered in England number 2146006; FCA 137569. Dart Capital Limited is authorised and regulated by the Financial Conduct Authority. The month saw strong returns from both equity and bond markets, while the falling oil price continued to capture investors’ attention. The major talking point over the month was the oil price, which continued its precipitous fall as the meeting of OPEC ended with no agreement on reducing output. The price of a barrel of oil, as measured by Brent Crude, fell from $85 to $69 over the month as over supply self corrects the market. The size of the move is expected to put many of the more speculative exploration and production (E&P) firms that operate in the US under pressure as high fixed costs mean the average firm in the sector requires an oil price above $70 to stay profitable. These firms tend to be large issuers within the US high yield market and passive, index-tracking funds in this space have suffered as a result. Furthermore, shares in the energy sector have been hard hit with expected dividend payments coming into doubt should the oil price prevail at these lower levels, as shown by the fact that MSCI World Energy index was down 9.1% (in US Dollar terms) over the month. Since the financial crisis, the monetary policy employed by most developed economies has broadly moved in line with the US, UK, Eurozone and Japan all employing nearzero interest rates to try and stimulate economic growth. However, with the US Federal Reserve ending its bond buying (QE) programme in November and signalling an intention to raise interest rates in mid-2015, in sharp contrast to the Japanese and Eurozone Central Banks which are looking to loosen monetary policy further and employ further bouts of asset purchases. The currency markets have reflected much of this with the Yen and Euro weakening 11.4% and 9.8% against the US Dollar this year respectively. These currency movements should help Europe and Japan benefit from a US recovery that has been bolstered by cheap energy, primarily due to the growth of fracking, and the comparative strength of the US banking system. The US economy has maintained continued strength over recent months despite the slowdown in the Eurozone and Japan. Due to its size, the US economy is more insulated than most western economies with exports only accounting for 13% of GDP compared with, for instance, the UK where exports comprise 27% of output. US GDP growth for the third quarter was revised up to 3.9% annualised from the previous estimate of 3.5% while the unemployment rate hit a 6-year low of 5.8% in October. The latter news coincided with the Federal Reserve’s much sign-posted decision to end their bond buying (QE) programme, a strong indication that they are confident in the economy’s current state. However, the weakness in the Eurozone and Emerging Markets is manifesting itself through weaker PMI survey figures for the manufacturing sector which fell from 55.9 in October to 54.7 in November. The fall in the oil price will have a nuanced impact on the US economy. Consumer spending should benefit as a large proportion of Americans spend a considerable proportion of their income on continued gasoline and the falling oil price will allow some of this spending to be channelled towards more discretionary areas. Conversely, employment growth in areas such as oil exploration is likely to slow. The S&P 500 returned 2.5% over the month (in US Dollar terms), boosted by reasonable profits growth for the index’s constituents which grew earnings at 7.0% over the 12 months to the end of September. The UK economy, while still growing much faster than the Eurozone, has seen some weakness from the exceptional levels of growth it experienced in the first half of 2014. Most prominently, export focussed industries have seen a slowdown in demand from the Eurozone and this has been reflected in PMI figures for manufacturing and services sectors which now sit at 53.5 and 56.2 respectively, well below their levels from the beginning of the year. This slight weakening in growth, combined with very weak inflationary pressures and a slowing of the housing market, has led to the Bank of England’s Monetary Policy Committee (MPC) becoming progressively more dovish over recent months with thoughts of interest rate rises pushed to the latter half of next year. The MSCI UK All-Cap index returned 2.5% in Sterling terms over November. Continued falls in inflation globally have helped push down bond yields with the yield on 10-year Gilts falling 32 basis points over the month. The performance of the Eurozone economy has disappointed many market commentators this year with the weakening of austerity, which many viewed as the potential catalyst for improved growth in the region, having been almost completely offset by the negative impact of sanctions against Russia. This culminated in September’s PMI for the German manufacturing sector which showed the sector had contracted, a stark figure for what is viewed as the engine of the Eurozone. To compound concerns, inflation falling to 0.3% has led many to fear Japan- like deflation in the currency bloc. Importantly, figures released over the month revealed that the German manufacturing sector bounced back in October with firms actually adding the most staff in 3 years. There are some positive catalysts for the Eurozone heading into the new year, particularly the weakening of the Euro which should help boost exporters, along with the ECB which has started asset purchases (QE). MSCI Europe exUK returned 4% (in local currency terms), led by strong returns from European domiciled multi-nationals which have benefitted from the weakening of the Euro. Following the surprise announcement at the close of October when the Bank of Japan announced a further round of bondbuying, market sentiment towards Japanese equities remained strong over November despite weak economic data. Most notably, figures indicated that the economy contracted by 0.4% quarter-on-quarter in the third quarter, a weaker than expected figure. MSCI Japan returned 6.2% (in Yen terms) over the month. The impact of the falling oil price has affected different Emerging Market economies in a variety of ways. Brazil and Russia, which are both large exporters of oil, have suffered from marked currency depreciation as they struggle with falling export revenues. In contrast, economies which are large energy importers, such as India and Indonesia, have benefitted from falling imports and diminished the need for the respective governments to implement fuel subsidies. The divergent fortunes were demonstrated over the month with MSCI India and MSCI Indonesia returning 1.6% and 0.7% in US Dollar terms while the Brazilian and Russian indices were down 4.8% and 10.9% on the same basis. All returns quoted as capital returns. Asset Class Performance – End November 2014 (in Sterling terms) Asset Class Dart Position 1 Month 3 Months 12 Months Index Cash +0.04% +0.12% +0.50% Bank of England Base Rate Fixed Interest +3.00% +3.16% +7.51% iBoxx Sterling Gilts All Maturities in GBP Equities - UK +2.46% -1.76% +0.50% MSCI UK All Cap in GBP Equities - International +3.80% +5.17% +11.63% MSCI All Country World Index ex UK in GBP Property +0.59% +3.14% +13.41% Financial Express UK Property Proxy in GBP Alternatives +0.04% +0.12% +0.50% Bank of England Base Rate Benchmarks are capital return which excludes income End of period 30 November 2014 Treasury yields data supplied by Bloomberg All other performance data supplied by Financial Express Analytics Overweight Neutral Underweight This document does not constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or needs of individuals. This research has been prepared with all reasonable care and is not knowingly misleading in whole or in part. The information herein is obtained from sources which we consider to be reliable but its accuracy and completeness cannot be guaranteed. The opinions and conclusions given are those of Dart Capital Limited and are subject to change without notice. The value of securities and the income from them may fluctuate. No responsibility is taken for any losses, including, without limitation, any consequential loss, which may be incurred by anyone acting on information in this document. It should be remembered that past performance is not necessarily a guide to future performance.