M
arkets remained range bound in
the face of an increasing likelihood
that better growth will lead to less support
from central banks. If economies prove
to be resilient, the long-term forecast is
positive despite the risk of short-term
market weakness. Economic news appears
to be fairly optimistic, which if sustained
may lead to some earnings growth in
2014 after two years of disappointment.
This will bolster con dence and may
encourage companies to use their nancial
strength on mergers and acquisitions
or improved returns to shareholders.
We continue to add to banks and miners
where past dividend credentials have been
disappointing, but we believe that could
change. Larger companies, having had a
subdued bull market (after ve years of
gains, we call that a bull market!), look
cheap and have attractive yields.The contra
argument is that they are too big to be
anything other than dull.We say‘Elephants
don’t have to dance, just touch their toes’
– changes at BP, Novartis and RioTinto
substantiate this.
C
orporate earnings results were a
mixed bag during the quarter. Google,
for example, reported good earnings but
the stock-price reaction was well in excess
of our assessment of the improvement in
business fundamentals. Cisco, on the other
hand, declined after reporting earnings,
as management warned of a slowdown
in emerging markets and several of its
product lines. In other news this quarter,
Royal Bank of Scotland Group (RBS)
announced the creation of an internal‘bad
bank’ which it will utilise to accelerate
the run-o of its non-core assets.The‘bad
bank’ is not an outright split from RBS, as
was previously debated.This will lead to
an acceleration of losses on the non-core,
distressed assets but is arguably neutral on
a net present value basis.At any rate, an
accelerated clean-up of the non-core assets
allows management to focus on the other
90% of the business which is the source
of current and future value.We increased
our position after the announcement.
We exited our investments in Hasbro
and Parker Hanni n in the fourth quarter
as both stocks reached our target price.
While our team is busy scouring the globe
for attractive investments, our cash levels
remain elevated and we continue to be
cautious about valuations.
G
lobal economic data during the
quarter was generally positive,
particularly from the US.The latter raised
the prospect again of tapering before the
year end or early in the new year, which
unsettled government bonds but was
well absorbed by equity markets. Sterling
strengthened modestly, which reduced
returns from overseas assets.We made
no signi cant change to asset allocation,
continuing to hold more cash than usual
to balance our underweight position
in overseas bonds. In UK equities our
recent focus has been on more domestic
situations such as house builders, building
materials and DIY & real estate, although
international earnings remain dominant.
Absolute investment returns have been
modest but relative performance has been
good, particularly in UK and Japanese
equities and overseas bonds. Equity
markets seemed a little schizophrenic in
the quarter; on the one hand looking for
economic growth that would support
earnings growth; yet then worrying that
faster growth would trigger tapering of
quantitative easing, which might reduce
the stimulus to asset prices. In the medium
term we believe the latter is more of a
concern for bonds but may also generate
a period of consolidation for equities in the
short term.We see no reason to change
our strategy which is to remain weighted in
equities and to underweight bonds within
our bonds and cash‘insurance policy’.
Adrian Gosden and Adrian Frost
Dan O’Keefe and David Samra
Richard Peirson
THE INVESTOR CENTRE
THE INVESTOR
|
27
ARTEMIS
UK & International Income
Companies could use greater
strength for M&As
ARTISAN PARTNERS
Global Managed
Global
RBS’ ‘bad bank’ creation to accelerate
run-off of non-core assets
AXA FRAMLINGTON
AXA Framlington Managed
Balanced Managed
Positive data from the US and a UK
focus on building-related equities
Economicnews
appears tobe fairly
optimistic
Our team is busy
scouring the globe for
attractive investments
Equitymarkets seem
a little schizophrenic
at present
A
