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Wealth
Management October 2014
Qu
arte
rly
Str
ateg
yWe remain convinced of the global economic recovery,
led by the US, and are therefore positive on equities. We
prefer the European and Japanese stock markets where
there is greater potential for earnings growth. We expect
both the Federal Reserve and the Bank of England to
raise interest rates in the first half of next year in the
absence of a significant slowdown. This keeps us
negative on government bonds and our sensitivity to yield
movements remains low. The US dollar looks set to rise
as a result of increasing US interest rates, this should
boost European and Japanese exporters and global
inflation. However greater demand for the greenback
may hinder emerging markets.
Economics
Strong rise in US data such as consumer confidence
Weakness in European data with declining consumer
and business confidence
Improvement in UK services outlook and demand for
staff
Markets
Global equities had a tough quarter, falling almost 4%
10-year Gilt yields declined 0.25% during the quarter
Action from the European Central Bank (ECB) has
weakened the euro whilst a strengthening US economy
has seen the US dollar appreciate
Equities
Since the weather-related downturn at the start of the year,
the US economy has recovered strongly but US equities look
expensive relative to the rest of the world. As such, we are
positioned broadly neutral in US equities.
Recovery in Europe has been slower as political tensions in
Ukraine and a decline in business confidence throughout the
region have taken their toll. However, supportive policy has
finally weakened the euro and we expect inflation to rise
from very low levels. Corporate earnings will likely improve
and the threat of deflation diminish. We see value in
European equities and expect their outlook to improve.
After a tax hike in Japan, consumer spending fell but the
economy is now recovering. Equities have rallied on the
back of a weaker yen and it is likely the Bank of Japan will
further ease monetary policy should the economy falter
again. We are positive on Japanese equities.
Sterling’s strong start to the year combined with a weaker
European economy put pressure on UK equities. Whereas
the UK should meet earnings expectations this year, we
expect 2015 to be more difficult. Growth in the UK is likely
to slow to more moderate levels.
We are broadly negative on emerging markets, especially
those with large external funding or current account deficits
which are vulnerable to a US rate hike (see chart below).
However we see some potential opportunities in India and
China.
Source: Bloomberg, as at 30th September 2014
Asset class Current Expected
Position next move
Equities + +
UK +
US +
Europe +
Japan +
Asia Pacific +
Emerging Markets -
Bonds -
Government - - ▲ Corporate ++
Alternatives -
Property -
Thematic Equities ++
Our current positioning, and an indication of what
our next portfolio change might be.
Key to symbols used in above table:
+ 1-3% overweight - 1-3% underweight
++ >3% overweight - - >3% underweight
Stronger dollar tends to be bad for emerging market equities
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
60
65
70
75
80
85
90
95
100
105
110
04/01/2000 04/01/2002 04/01/2004 04/01/2006 04/01/2008 04/01/2010 04/01/2012 04/01/2014
USD trade weighted LHS FTSE world ex UK equities vs EM equities both in GBP RHS
Fixed income
We see a risk that interest rates in the US may rise faster
than the market currently expects, which should push yields
up. Interest rates in the UK look likely to begin rising by
the middle of next year. We expect US and UK sovereign
bond yields to rise over the next 12 months and our holdings
are biased to have a lower interest rate sensitivity (prices
move inversely to yields). The UK housing market is more
susceptible to rising interest rates than its US counterpart so
we expect UK rates to peak lower than in the US given that
there has been less of a correction in house prices here.
We believe yields in Europe will stay lower for longer com-
pared with yields in the UK and US, given the weaker out-
look.
Tight credit spreads mean that investment grade corporate
bonds now have less opportunity to outperform
government bonds. Given the current strength of the
economy, we do not see greater default risk being priced into
credit spreads* soon but the extra yield previously on offer
for holding corporate bonds has declined. We expect our
next move in bonds to be a reduction in credit exposure.
Currencies
Economic recovery in the US looks strong. Consumer
spending is improving, the current account deficit is closing
and there is good potential for wage growth.
Recovery in the UK looks a little less stable; the general
election next year and a potential referendum on EU
membership in 2017 bring uncertainty for business and
consumers which hinders economic growth. Given the
strength of the US versus the UK, we see sterling depreciating
against the US dollar.
Supportive policy in the eurozone has started pushing the euro
down, the threat of deflation should diminish and the European
economy should now start to recover again.
However, with eurozone interest rates likely to remain low for
a long time, we would expect euro weakness against the dollar
and sterling (where rates will rise sooner).
Japanese monetary policy is likely to remain supportive with
low interest rates and large-scale quantitative easing aimed at
lifting the economy out of deflation. As the US and UK raise
interest rates we would expect the yen to weaken further.
Source: Bloomberg, as at 30th September 2014
Source: Bloomberg, as at 30th September 2014
Tight spreads leave less room for corporate bond outperformance of government bonds
As the UK raises interest rates and Europe doesn’t, sterling should strengthen against the euro
*credit spread is the difference in yield between bonds, due to a difference in their credit quality
C. Hoare & Co.
37 Fleet Street
London EC4P 4DQ
C. Hoare & Co.
32 Lowndes Street
London SW1X 9HZ
T: +44 (0) 20 7353 4522
F: +44 (0) 20 7353 4521
www.hoaresbank.co.uk
For questions about this article, please contact your Portfolio Manager or:
David Cavaye ([email protected])
Chief Investment Officer
Richard Garland ([email protected])
Head of Investment Strategy
Michael Bell ([email protected])
Investment Strategist
Oliver Blackbourn ([email protected])
Investment Strategist
For new business enquires, please contact:
Simon Barker ([email protected])
Important Information
The information contained within this document is believed to be correct but cannot be guaranteed. Opinions
constitute our judgment as at the date shown and are subject to change. This document is not intended as an offer or
solicitation to buy or sell securities or other investment or banking products, nor does it constitute a personal
recommendation.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) redistributed
without the prior written consent of C. Hoare & Co.
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Published on 1st October 2014 by C. Hoare & Co., 37 Fleet Street, London, EC4P 4DQ. Authorised by the
Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation
Authority with firm reference number 122093.
