T
he start of the year was marked by
widespread risk-aversion and the sell-o
in emerging markets.This spurred concerns
of more volatile assets and whether we’d seen
a technical correction or a shift to pessimism
around China’s economic outlook. In the
US, investors started to question the validity
of forecasts of earnings growth of 8% over
the next three years, given a forward price-
earnings ratio of 15.5 and that much of their
recent increased pro tability and earnings
was due to wage stagnation, stock buybacks
and one-o intensive cost-cutting, which are
unsustainable.With improving economic
conditions, UK equities were among
the best performers during the month.
Continental European economic conditions
also continued to improve during the second
month of the year as Italy nally broke free
of its recession (in spite of another change
of leadership) and with the purchasing
managers’ index continuing to indicate
expansion. In the absence of international
sanctions on Russia, the e ect of events in
Ukraine on markets was limited, except for
Russian equities and the rouble, which have
been severely impacted.Any interruption
to the natural gas supply from Russia
could endanger the fragile recovery
in Europe. For the quarter to 14 March
2014, developed equity markets returned
-0.8%; with a lower risk appetite, the
MSCI Emerging Markets Index signi cantly
lagged, with a -6.2% return (both in
US dollar terms).
U
K government index-linked
bonds continued to outperform
conventional gilts at the start of the
rst quarter. Index-linked bonds rallied
across all maturities in January.Yields of
conventional gilts also rallied in the month
with the exception of the very short end
of the yield curve, as the volatility in
emerging markets led a ight to quality.
Data released in January showed an
improvement in the UK economy.The
December CPI recorded a slowdown in
UK in ation to 2%, although there was
a slight uptick in the RPI gure.With
external factors continuing to drive
markets, conventional UK government
bonds traded in a range-bound manner
during February, with very little
performance change since January.
Index-linked bonds maintained their
outperformance over conventional gilts.
UK in ation cooled in January, slowing
to below the Bank of England’s (BoE) 2%
target for the rst time since November
2009.The BoE issued its latest In ation
Report in February. Final Q4 GDP data
released in February recorded a slight
rise. Over 2013, the UK economy grew
at its fastest pace since 2007. The fund has
been generally positioned in line with the
benchmark over the period.
Nimish Patel and Eleanor de Freitas
THE INVESTOR CENTRE
THE INVESTOR
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BLACKROCK
Core manager: Global Equity
UK equities are strong performers
as European economy improves
BLACKROCK
Index Linked Gilts
Things looking up for UK economy
as inflation slows to below 2%
UKequitieswere
among the best
performers
Index-linkedbonds
rallied across all
maturities in January
Francis Rayner
T
he strong market rise of 2013 was
driven largely by an increase in share
valuations to levels more in line with
longer-term averages as investor risk
appetite returned. In the rst quarter
of 2014, this has given way to greater
volatility in equity markets as investors
adjust to the US Federal Reserve‘tapering’
its monthly asset purchases, softening
economic growth inAsia and low nominal
global economic growth.The portfolio
started the new year on the front foot,
with outperformance driven by strong
earnings at Next, BSkyB, easyJet and Shire.
Next raised its yearly pro ts outlook on
the back of strong sales, pushing the shares
to a record high. On the negative side,
the importance of companies delivering
on earnings expectations was evidenced
through holdings in BG Group and
Standard Chartered, which both fell after
disappointing the market; and we have
reduced our positions.The UK economy
has continued to recover and we have
added exposure to UK house-builders
through a purchase of Berkeley Group
and have added to plumbing and building
distributorWolseley.We have maintained
global exposure across the portfolio and
have added to Reed Elsevier and Essentra.
Our concentrated approach to portfolio
construction suits the current market
environment as the removal of stimulus
should lead to fewer distortions and a
greater focus on company fundamentals.
BLACKROCK
UK & General Progressive
Greater volatility in equity markets
and low growth worldwide
The portfolio started
the newyear on the
front foot
Luke Chappell
