Chapters Financial Investment Committee / The US Economy

Each client and enquirer has a different view and approach to investment. They are all different and this is only natural.

Many retail advisory propositions also have different views on the way funds in whatever format (Pensions, Investments, ISA’s as examples) should be invested, some preferring passive investment over more actively managed planning.

Over the last 9+ years, Chapters Financial has always preferred an actively managed approach to investment. We believe this adds greater value to our client proposition. Past performance is not a guarantee of future performance.

To further this active investment strategy approach to investments, Chapters Financial Limited maintains and updates a regular view of the investment markets. We obviously have our own opinions (if you know the team at Chapters Financial you will know that they are not a shy group!), and add to our robust procedures by consulting with an independent specialist, Steven Williams, Director at Cormorant Capital Strategies Limited on a quarterly basis.

More detail on the work of Cormorant Capital Strategies Limited can be found here: http://www.cormorantcapitalstrategies.com/
Chapters Financial Limited is not responsible for the content of external webpages.

At our last Investment Committee Meeting in January 2014, we considered many investment areas. As an example, we looked at the US sector and I have received additional feedback and comment from Steven Williams, which is detailed below:

There is a good chance that 2014 will be the year that the US economy escapes the mire that has characterised the last five years or so. Certainly the conditions for continued progress are in place.

The US job market is strengthening. The unemployment rate stands at 7.0%, nowhere near the sub-5% pre-crisis levels but much improved on the 10% rate in 2009. With non-farm payrolls increasing at a rate close to 200,000 per month, further improvements in the employment situation ought to follow. In addition, the necessary process of deleveraging is maturing. US banks can boast of greater than average rates of tier-1 capital, non-financial corporate profit margins have seldom been wider and, according to Moody’s economy.com, the ‘average share of after-tax income that households must devote to servicing debt is as low as it has been since 1980’. Furthermore, consumer confidence – which suffered a knock during the government shut-down - has rebounded. It seems consumers are cognisant of improving conditions now and expectant of continued improvement to come. Of course, the outlook is not without risks to the downside.

I count three major risks to the outlook for the US economy. The first, and most dangerous, is that of exogenous shock – a genuine surprise. The only insight I can offer into such an event is that they occur more frequently than most investors expect and that at this time the US, in common with other regional economies, is remarkably vulnerable. On the other hand, most investors are wearily familiar with the second and third risks on my list. 2014, just like 2013, will be characterised by the political battle for control of the budget, including more wrangling over the debt ceiling. Finally, the Federal Reserve will be keen to continue to taper its present stimulus package and a disorderly exit has the potential to upset financial markets across the globe (investors in emerging market economies beware).

But, for all of this analysis, investors ought to be aware that asset prices and the wider economy do not move in lock-step. Whilst there is, I think, an absence of compelling evidence to suggest that equity markets are significantly over-priced there is equally a lack of evidence to suggest the counter.

Steven Williams, Director at Cormorant Capital Strategies Limited

No individual advice has been given in the course of this blog. Past performance is no guarantee of future performance. Investment values can fall as well as rise and are not guaranteed.

If you would like to discuss the investment opportunities with regards to your own individual situation and circumstances or any aspects of financial planning, both personal and business (SME), then please contact the team, either in Guildford or Woking.

Keith Churchouse FPFS
Chartered Financial Planner
ISO22222 Certified Financial Planner

Chapters Financial Limited 

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899

USA Leading or UK Lagging?

We have all witnessed a degree of increased globalisation over the last 20 years as a result of the information age.  Many large corporations have expanded their global presence and ventured more into overseas markets than ever before. This in turn has led to the major stock markets, and correspondingly the indices, being more closely correlated over time. 

We are all very aware of the Credit Crunch and the following aftermath in the markets, in currencies, cash-flow and economies around the world. However, we are now starting to witness much more positive data regarding the recovery of the UK economy as well as that of the USA. 

Obviously past performance is not a guarantee of future performance. 

This raises the question, are they recovering at the same rate?

USA Leading?

The Dow Jones Industrial Average (DJIA) closed above 16,000 for the first time on Thursday 21 November 2013, finishing at 16,009.99. This has seen the index growing over 22% from 02 January 2013, when the index opened at 13,104.30.

Even looking at the S&P 500 Index, which some believe to be a better ‘yardstick’ of the US stock market than the DJIA, this has risen 25% from opening at 1,426.19 on 02 January 2013 to close at 1,795.85 on 21 November 2013.

UK Lagging?

In comparison, the rise in the FTSE100 (as an example) is somewhat short of this increase, showing a growth of just 13% from an opening of 5,897.19 on 02 January 2013 to close at 6,681.33 on 21 November 2013. Therefore, if we are using the FTSE100 as the measurement of the recovery of the UK equity market, the UK is only recovering at approximately half the rate of the USA. This is an interesting observation, rather than a direct comparison. 

Some might argue that the difference could be due to the Sterling to Dollar exchange rate at these dates, which is an important consideration. However, the currency exchange rates on these dates were £1 = $1.6249 (02 January 2013) and £1 = $1.6199 (21 November 2013), therefore the impact of the exchange rate is less than 0.5% between these dates.

Which market / economy will correct and when?

The soon to retire Mr Bernanke, Chairman of the Federal Reserve, has already indicated that he may taper or slow down the fiscal stimulus into the US economy. Many economists believe that the markets have already factored in his statement in this regard, but if they have not, the impact may not occur until March 2014. 

The Bank of England has provided its own stimulus to the economy in the form of Quantitative Easing (QE) to the tune of £375BN. In comparison with the USA, it has not increased this QE programme since July 2012.

It is believed that Mr Bernanke will continue to signal the reduction in the stimulus as the US data on production, employment and other economic factors improve. This could mean that the indices in the US stock markets (DJIA / S&P 500) will not rise when compared with the UK index (FTSE 100) as the fiscal stimulus package in the USA is reduced and eventually stopped. How long will this take? I believe it will be at least 12 months before we see a significant correction between the correlation of the USA and UK equity markets, possibly even longer.

No individual advice has been given in the course of this blog. Past performance is no guarantee of future performance. Investment values can fall as well as rise and are not guaranteed.

If you would like to discuss the investment opportunities with regards to your own individual situation and circumstances or any aspects of financial planning, both personal and business (SME), then please contact the team, either in Guildford or Woking.

Simon Hewitt BSc (Hons) DipPFS

Financial Planner

Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.