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THE INVESTOR
THE INVESTOR CENTRE
All information correct as at 30 June 2015
T
he debt crisis in Greece continued to
drive headlines during the second quarter
of 2015, as the country continued to fail to
reach an agreement with theTroika to secure
further bailout funds.The escalation of the
Greek crisis led to volatility in bond markets
over the course of the period as concerns
about the future of the eurozone increased.
Global data was mixed during the second
quarter.The US, which has been the main
driver of global growth, experienced a 0.7%
contraction in GDP during the rst quarter
of this year. However, data released in the
second quarter showed that payrolls, housing
and consumer con dence all bounced in the
latter half of the period. In Europe, business
and consumer con dence remained at high
levels and the German Consumer Prices
Index rose, an indication that the European
Central Bank’s bond purchases may be lifting
in ation. Nevertheless, concerns surrounding
a Greek exit from the eurozone persist. In the
UK, GDP growth of 0.3%was announced
for the rst quarter, which was weaker than
expected, driven mainly by softness in the
construction sector. However, service sector
activity accelerated amid growth in new
business and improved business con dence.
UK in ation dropped into negative territory
inApril because of lower food and energy
prices, but this did bounce back to a positive
number by the end of Q2.
A
s a result of closing some positions
during the previous two quarters, the
portfolio entered the second quarter of 2015
with no exposure to either mainland China
or Hong Kong. Even so, we continued to
research companies in those areas as part
of our normal investment process. Our
e orts yielded a number of companies that
we added to the portfolio during the second
quarter.The Hong Kong-based asset
management rmValue Partners Group
Limited is one of the new additions.While
we expect to maintain below-benchmark
weightings in mainland China and Hong
Kong, we thinkValue Partners provides
excellent exposure to the broad region,
which also includes Macau andTaiwan.We
believe mutual market access (MMA)
between China and Hong Kong will lead
Chinese insurance companies, pension funds
and banks to invest signi cantly outside the
mainland to improve portfolio diversi cation.
Value Partners is one of relatively few rms
with the experience and capacity to handle
those large asset ows. In addition to
traditional management fees, many of Value
Partners’ investment products carry
performance fees based on returns above a
certain historical value, or‘high-water mark’.
Since most of the rm’s products are now
above their prior-year high-water marks,
Value Partners may e ectively provide more
exposure to China and Hong Kong than the
position size might indicate, particularly
when underlying markets are strong.
WELLINGTON MANAGEMENT
Gilts
UK Gilts
US rebounds in second quarter and
European confidence remains high
WASATCH
Emerging Markets Equity
New positions taken up following
research in China and Hong Kong
EuropeanCentral
Bank’sbondpurchases
maybe li ing in ation
Value Partners Group
Limited is one of the
newadditions
A
s is often the case over shorter
time periods, some recent market
movements have been di cult to explain
rationally. In the US, disappointing rst-
quarter GDP gures were shrugged o by
the market, which has perhaps concluded
that slowing growth is good news because
it delays the start of interest-rate tightening.
Nevertheless, in a reversal of recent trends,
the US dollar weakened, which led to a
rally in oil and other commodities; and
(in our view somewhat premature) fears
of renewed in ation led to a spike in the
yields of US Treasuries and other sovereign
bonds. Not all of these price movements
are mutually compatible, suggesting that
markets have been driven more by ow than
by fundamentals.There was, however, one
striking fundamental development in the
UK: the general election confounded the
opinion polls by delivering a majority for the
Conservative Party on 7 May.The greater
certainty entailed by a majority government
led to relief rallies in the pound and the
UK equity market, but the result does not
remove all of the political uncertainties that
the UK faces. Nevertheless, much less
benign outcomes were widely expected, and
a more conclusive result is less concerning
for the economy, although we continue to
expect modest growth at best over the next
few years.
WOODFORD
Income Distribution, UK Equity and
UK High Income
Weakening of US dollar does not
mean imminent renewed inflation
Markets have been
drivenmore by ow
than fundamentals
Ajay Krishnan and Roger Edgley
Haluk Soykan
Neil Woodford
