Download Market Commentary March 2016

Investor Newsletter & Market Commentary March 2016
Whilst January brought collapsing markets with little
good news, February saw the oil price start to find a
bottom and support from buyers.
Whilst you could not draw a completely straight line
between the two, you can say that what we had seen in the
first six weeks of 2016 was as a result of sovereign wealth
funds having to sell their most liquid assets, namely equities,
to make sure they had enough in the coffers to match their
liabilities with lower oil prices. We had estimated that with
the oil price at around $30, then the like of Saudi Arabia
would be approximately $100bn in a hole as they depend
almost 100% on the revenues from oil sales to run their
state.
It would appear, and at this stage we can only speculate,
that this selling is over for now and therefore the markets
have rallied approximately 10% from the bottom in midFebruary. The practice we employ at OCM is to always look
whether anything material has changed to our assumptions;
if it is just sentiment we should not change tack and let it
pass, or is it something more fundamental? When we spoke
to many of our clients in the last month, we emphasised that
what we are seeing is not rational and therefore something
we should have to let pass despite the journey being
uncomfortable. However, we did acknowledge at the end of
2015. That we need to reduce our exposure to this market
volatility and as such are almost finished in moving to these
portfolios. The final part of this process was to get our
portfolios audited by a third party, in this case the French
bank Natixis, who confirmed that our assumptions of
lowering volatility and eliminating as much of the market
downside as possible were in fact happening. What this
means moving forward is we should be capturing virtually all
of any market upside, whilst leaving ourselves exposed to
significantly less downside. Whilst this won’t eliminate losses
entirely, it should make the investment process less spiky
and allow us all to sleep a little easier at night.
Oil Prices
Most of the market moves can be correlated to the oil price during 2016, and what we are seeing and hearing is a sentiment change. We
wrote three weeks ago in the weekly market commentary that we think the bottom to the oil price is being established, and whilst we don’t
think there will be a snap back in the price, we think it has found a natural low. We based this on the data we were seeing from the options
markets, namely that buyers were back and now outweighed the sellers forcing the price down. This is now at its highest level since 2011
and is a clear sign that markets want to give oil producers an opportunity to show they can make shifts in production. What we are also
basing this on is the public statements from OPEC member states. Meetings with OPEC members like Venezuela and the Saudi finance
minister were taking place to discuss how best to curb these market fluctuations, and, we note that the UAE Finance minister stated that oil
prices should return to normal by year end.
Global Indices
However, it is bad news if the OPEC nations become distressed sellers of equities as they have been year to date, so it is in their interest to
help make things more manageable. However, we must remember that inventories remain sky high; running at the highest level in eight
decades, so we are thinking it is very unlikely to snap back much above $50 a barrel in the medium term. Obviously a sustained period of low
oil prices is good for consumers, but given the original reasoning for lower oil prices was to increase OPEC’s market share, we feel any rise in
the price will see non-OPEC production increase once more. Clearly this is not an easy problem to solve, hence our neutral stance for now,
but we take a deep breath ahead of the June OPEC meeting.
Investor Newsletter & Market Commentary March 2016
Global macros
2016 has been annus horribilis for Europe so far, be it regarding
Brexit, the refugee/migration question and the breakdown of
the Schengen agreement, or economic data; most news has
been negative. European data out on Monday saw what we
expected, namely that we are seeing deflation on the back of
the lower oil prices. If we strip this out we are seeing inflation
now running at 0.3% from 0.7%, which again raises the
question, what will the European Central Bank (ECB) do next?
The obvious call is an enlarged asset buying programme to push
core prices back up once more. The next major event for
Europe is the ECB meeting on Thursday, March 10. Draghi is
widely expected to lower interest rates further into negative
territory, perhaps to -0.4% or even -0.5%. The market is also
forecasting an expansion of sorts from the QE programme, but
if Draghi disappoints, the consequences could be profound. In
December, EUR/USD fell nearly 4% intraday after the ECB’s
announcement of no action. Whilst the long term rationale of
the dangers of such easing will no doubt be debated in a more
rational manner by our children’s generation, for now, the
market wants and is expecting more material easing and as such
is positioned for it.
Should Mario Draghi disappoint in his comments later this
week, then expect a similar market reaction to before and we
are positioned accordingly to enact our plan to adopt a more
defensive stance. Our view seems to be simple, in that Draghi
has seen in December the consequences of doing nothing and is
unlikely to wish to repeat. Likewise, the Euro at the time was
bumping along the bottom of its range, but has strengthened
since and in particular against Sterling the stronger currency
gives him a little more wiggle room to deploy say another
EUR20bn per month to help sustain the recovery in Europe.
Markets will also react in a very good way if he should widen
the net to include some distressed assets, and therefore take
more risk off the table. So there are several outcomes the
market expects and hopes to happen, and if they do, then do
not be surprised if we see a continuation of the recent recovery.
US Elections and what Super Tuesday told us is that Donald
Trump continues to split opinion, but he is gathering a large
wave of supporters
“Super Tuesday” in the U.S. saw Donald Trump sweeping to
victory across the south and New England, with an alarming
amount of support now being amassed. With strong support
from low-income white voters, especially those without college
degrees, is not that surprising. He has now dominated in
moderate, secular-leaning Massachusetts just as easily as he did
in the conservative and heavily evangelical Deep South. Mr
Trump took almost 50% of the vote in Massachusetts, and about
a third of the vote elsewhere. Clearly he now appears to be the
favourite to win the Republican nomination, despite Mr Cruz’s
success in Texas and Minnesota. It is interesting to note the
reasons to why someone like Donald Trump is resonating with
voters to this degree. One consideration is the constant decline
of spending on labour as a percentage of annual GDP for most
developed nations over the last 40 years, as is clearly shown in
things like the fall in manufacturing jobs. In theory it has left a
glut of people disenfranchised by the state and the current
offering from the main political parties. This has created a
division within the Republican Party between the Trump and
anti-Trump camp. All the candidates really need to come
together to try and defeat him. If they pull themselves apart
rather than unifying, then this could be very difficult to come
back from.
We feel that the markets are viewing Trump very much as a
sideshow for now, and there seems little doubt that Hilary
Clinton will be elected to the become the next President come
November. However, should we have a shock result of Trump
being elected, then the only thing we can say clearly is that
volatility is going to increase, and the overall direction of the
market will probably be a little harder to see. You would have to
assume things like defence and healthcare companies would
suffer until he has made clear his policies. We shall continue to
monitor and watch how this develops over the next few months.
Has Gold now found its bottom and look like an investable
asset class once more?
Global equities has had a tough start to 2016, but has also seen
very significant inflows in Gold. The price has rallied from a low
at the start of the year of $1050 per ounce to $1200 as we write,
which is a rise of nearly 20%. Normally, we see Gold as being an
inflation hedge, but what we are seeing at the moment is it is
becoming a hedge for fear of the problems we have seen year to
date, being more problematic and deep rooted in developed
markets. January saw the second largest inflows into Gold ETFs
ever, and whilst we await February’s data, one must think it is
similar. Whilst the world remains uncertain, with asset prices
falling, then we expect this move to a safe haven like Gold to
continue, but mindful, that this will be sold off once more if the
world is convinced we are back to being in a better place.
Commodities also looked better after comments from Chinese
policy makers
Iron Ore soared after Chinese policy makers signalled their
potential to reignite growth once more and this saw the core
price rally by the largest amount since records began of +24%.
This takes it back to the strongest level seen in six months, and
adds credence to the case that the support level has been found
in the never ending decline in base metal prices. The same can
be said for Copper, which has also traded approximately 15%
better from the lows at the start of 2016, Aluminium (+6% YTD),
Zinc (+8% YTD) and Tin (+17% YTD). All of this is very positive for
those companies that are reliant on these prices, for example
the Australian economy and larger parts of the FTSE100, but it
provides a bit more optimism that the global economy is
stabilising as demand appears to be recovering. What we
believe is that a bottom has been formed, and the constant
marking down on these prices seems to have abated for now.
Does this then mean that we shall see the highs of 2011 return?
No - that seems unlikely – but we do believe prices have found a
level where the shocks of a massive slowdown have been priced
in.
Investor Newsletter & Market Commentary March 2016
Brexit
It is no surprise that since David Cameron announced the
proposed terms of his renegotiation with Europe; the knives
would be out for him and also the Euro-Sceptics. We have seen
several accusations of scaremongering from both sides, which will
surely get worse on the run up to June 23rd. Looking at the on-line
betting, then it still seems that we shall remain in Europe come
the end of June, and certainly the rebound back in Sterling back
from 1.38 to 1.42 seems to reflect this also. So whilst the public
seem to be slightly more convinced than not for now, investors
are not. If we look at how this will affect markets in coming weeks,
UK lenders are delaying selling bonds ahead of the referendum.
This has meant markets in things like convertible capital bonds,
where banks issue bonds relative to their capital position, has
become much harder to invest in, until the vote has happened.
Any delay in issuing bonds will be bad news for UK Banks, as firstly
most have to issue more paper to meet new rules by 2019, and
secondly, for the broader economy, clearly any slowdown in
lending will dampen growth. This is exactly what we will expect to
happen, and therefore the knock on effect for sectors that depend
on lending, like house builders, will be felt for the next few
months.
Model Portfolios and Benchmarks…
Whilst the portfolios and their benchmarks are producing a
negative number for the year to date, the spring back in the last
month has been positive as markets have recovered from their
lows of mid-February. This pull back since the first Federal Reserve
interest rate rise at the start of December has been negative on
portfolio performance. Whilst we think that earnings, especially in
Europe look likely to have another tough year, and as such this
will mean more volatile markets for 2016, we have adjusted the
asset allocation to funds that have little embedded volatility. This
should see us capture most of the upside in the market when it
presents itself, but having little of the expected downside. This
upside capture / downside protection is our target for the next
few quarters.
Summary
We continue to monitor, watch and define, and put your needs first and we look forward to delivering that goal and your objectives in
2016, if the market gives it, if not we will put capital preservation ahead of the roller coaster.
Jason Stather-Lodge
CEO & CIO
OCM Asset Management is a trading name of OCM Wealth Management Limited, who is authorised and regulated by the Financial Conduct Authority Number 418826.
OCM Wealth Management Limited registered in England No 5029809. Registered Office @ 3 Bouverie Court, The Lakes, Northampton, NN4 7YD.
Telephone 01604 621 467 - Web Address www.ocmwealthmanagement.,co.uk
Investor Newsletter & Market Commentary March 2016
Individual Asset Classes & House View
Cash
A gauge of the outlook for UK inflation again touched the bottom once more amid a slump in commodity prices that may hinder the Bank of England’s progress toward raising interest rates. The
latest November data also shows things are moving backwards slightly with a small drop of -0.1%, but the reality is that we have been at or close to zero inflation since February 2015. Obviously, the
main driver is oil prices, which started to move downwards in the last quarter of 2014, so real inflation numbers will be better judged when we have a like for like comparison on the lower oil price
which takes us to the start of 2016. For reference, when the oil price was over $100 a barrel, so in turn UK inflation was 1.3%. However, we are now seeing oil at pretty much the bottom of the curve,
but in recent weeks, with the outlook for UK rate rises being pushed back, so the foreign exchange rate for Sterling has fallen to 1.38, meaning that the reliance may move to wages and jobs data as
to whether the economy can sustain increased borrowing costs. Looking at recent data, then it seems that the first UK interest rate rise is a moving target, with most looking at possibly early 2017,
but this may tighten slightly if the data keeps improving.
Gilts
Having seen the UK 15 Year Gilt peak at a yield of 1.7% in mid-February, we have seen the expected fall in prices from there, with the same yield trading at 1.9% today. We are keeping a very close
eye on economic data in terms of the date and strength of any interest rate rises, as the timing of this is likely to be pushed out until the economy can absorb the increase easily. When the move
comes, we expect it to be slow and steady, possibly over a number of months even years and thus Gilt valuations will fall and yields will rise. Our outlook on this asset class remains negative as we
feel that it is difficult for any value to be derived from being invested in this asset class at current levels despite the moves from the lows noted above.
Corporate Bonds
Despite its performance during the last twelve months, we feel corporate bonds will perform in a similar manner to UK Gilts. During the coming 12 months, we are reducing our expected contribution
and allocation to reflect this stance and will remain underweight in these assets in an environment when interest rates are expected to rise.
Strategic Bonds
Whilst we have seen this area sell off over the winter of 2015/6, overall it has performed well during the last 12 months. Although not immune to the moves in the markets, the strategic bond funds
allow dynamic hedging against excessive volatility.
OCM Asset Management is a trading name of OCM Wealth Management Limited, who is authorised and regulated by the Financial Conduct Authority Number 418826.
OCM Wealth Management Limited registered in England No 5029809. Registered Office @ 3 Bouverie Court, The Lakes, Northampton, NN4 7YD.
Telephone 01604 621 467 - Web Address www.ocmwealthmanagement.,co.uk
Investor Newsletter & Market Commentary March 2016
High Yield
We are underweight on high yield assets globally as we believe that the volatility associated with a rise in credit spreads caused by rising interest rates in the US and the UK, means these assets are
too risky to be included in a client’s portfolio and considered non-equity. As rates are expected to rise in both the US and then the UK as we transition through 2016, this will in turn bring a new
examination of corporates ability to repay their debt, and therefore we would expect credit default swaps (CDS) to widen as risks of defaults increase. Our preferred choice if we had to allocate would
be to look for managers that are more focussed on both European or Asian markets where we expect little or no risk of rate increases in the short term. However, we are mindful of any currency
devaluation(s) in the Emerging Markets, which may prove difficult for those who have issued $ or Euro denominated debt to repay.
Global Bonds
As a whole, we expect global bonds as an asset class to underperform relative to their equity counterparts, and as such, we are underweight with no directional exposure. UK and US government, and
corporate bonds being our least preferred investment class due to the likelihood of aforementioned interest rate rises. Within the Eurozone, we do not see interest rates changing during the next
twelve months, and we have seen several European corporates issuing bonds with negative yields, allowing us to expect bond prices to remain high within the region and therefore a positive
contribution to our portfolios.
Infrastructure
Infrastructure has shown lower levels of volatility than many other non-equity assets and in addition, good risk adjusted returns. With a continued focus globally on Infrastructure projects being
invested in to drive employment we see this asset class as one that is a core element of the property element of the non-equity bias within a client’s portfolio. Going forward, we have continued to
see a further expansion in the Asset Backed Securities (ABS) programme in Europe, so we expect infrastructure and property assets to continue to grow.
Property
On the commercial side, we have seen yields within the M25 stabilise whilst those outside have narrowed the yield gap between the two. Commercial and office space retain high occupancy levels,
with yields getting back up towards historic highs whilst the capital growth of these assets has slowed compared to the 2014 returns. The commercial side, (retail, office space and industrial) will
continue to produce returns if asset selection is correct, as we have seen a structural change in people’s shopping and working habits. Investment in the commercial side continues apace, and aligns
to a positive return coupled with low volatility, and we continue to feel this will be one of the better performing asset classes during 2016 and into 2017. We note at the moment, the Aviva fund is
pricing off the bid side and not the offer, and hope this will revert once more soon, as this has been the case since July 2015. Overall, we expect the property funds we use to provide c20% return
over the next three years, but this may be slightly front end weighted.
Absolute Return
We continue to have an exposure to absolute return funds, to allow some diversification within our portfolios, where we expect a modest, lower volatile contribution to be made during the coming
six months.
OCM Asset Management is a trading name of OCM Wealth Management Limited, who is authorised and regulated by the Financial Conduct Authority Number 418826.
OCM Wealth Management Limited registered in England No 5029809. Registered Office @ 3 Bouverie Court, The Lakes, Northampton, NN4 7YD.
Telephone 01604 621 467 - Web Address www.ocmwealthmanagement.,co.uk
Investor Newsletter & Market Commentary March 2016
UK Equity – FTSE 100
Our view on the UK has shifted over the last few weeks, in that oil seems to be finding a new bottom at $26/7 barrel. Most of the UK energy stocks have adjusted to the new world of low energy
pricing, and have cut their cloth accordingly. We are also encouraged by some producers saying they will “turn the taps back on” at $40 and above. On the commodity side, the bottom does not seem
to have been found as yet, but we are watching what happens with interest rates in China to possibly provide a floor for consumption. Additionally, we feel there is some positive earnings optimism
into next year which means that current valuations do not look onerous. Lastly, Gold has had its best month in many years as investors have looked for safe havens, which has been positive for the
index.
USA Equity
During the last earnings season of 2015, US Companies’ reports were positive as a whole, but the strong dollar and the obvious oil & gas headwinds presented themselves. Whether it is oil service
groups, large equipment manufacturers or the like, there have been obvious issues with the lower oil price. Against this, most US indices are down year to date still, especially in the technology sector
where growth is hard to come back. We are therefore holding a neutral stance on the US with half of our exposure to the Russell 2000 and rest again in mid-cap areas as we expect these to have the
least impact of the sky high US $.
European Equity
The lack of clarity on enlarging the ECB QE programme has meant we have seen a period of volatility in Europe amongst the main exchanges during the last weeks of 2015. European equities have
been bereft of road bumps in the last year, whether that is the Greek “default” talks, Chinese economy woes and the VW scandal that have all added to volatility, but overall, we feel that corporate
Eurozone is in good shape, with competitive exports on the back of the lower Euro and also strong balance sheets as borrowing levels have never been so cheap. However, given the amount of
exports to China, we have to monitor matters there closely in relation to the big European manufacturers. The shift of timing in the US rate cycle saw profit taking across most European bourses, but
with the ECB war chest still primed on high-grade assets, we have seen a sharp recovery back from these levels, particularly in Germany.
Emerging Markets Equity (EM)
Whilst many EM economies are built on resources, whether that is oil or base metals, the effect of lower prices and higher US$ has been clear to see. Overall, we are taking these countries out of our
thinking – with countries like Venezuela and Russia trading on low multiples, but without an obvious catalyst for change. In the short to medium term, we see little changing here. What we do like are
some of the thematic changes (growth of the middle class, education levels, computer literacy, urbanization, move from brick to clicks etc) added to areas where we see real technology or value
emerging. The polarisation of brands, where we are seeing the top and bottom end produce better returns than the middle, has meant that allocation to countries like Taiwan are now very possible.
Additionally, we are expecting interest rate rises in the US – and the knock on effect for the US Dollar – to benefit these EM countries strongly.
OCM Asset Management is a trading name of OCM Wealth Management Limited, who is authorised and regulated by the Financial Conduct Authority Number 418826.
OCM Wealth Management Limited registered in England No 5029809. Registered Office @ 3 Bouverie Court, The Lakes, Northampton, NN4 7YD.
Telephone 01604 621 467 - Web Address www.ocmwealthmanagement.,co.uk
Investor Newsletter & Market Commentary March 2016
Asian & Indian Equity
As a subset of the Emerging Market space, we feel that India looks more appealing given the reforms brought about by the new Government, which has led us to become more positive. However, the
country has really benefitted from lower oil and commodity prices as it is a large importer of both, which has allowed the economy to be in the best shape it has been in for many years. There has
also been modest interest rate cuts (0.25% out of an interest rate of 7.25%) meaning the Reserve Bank of India has plenty of ammunition in its pocket. There is never a perfect environment to assess
what is best to cut – too much and it sends panic tones out on the economy, too little and there is not enough stimuli to reignite growth. We will continue to monitor this situation in the coming
months, but so far so good in terms of what we have seen from India.
Within Asia, there are also selected economies where we are positioned to invest in leading global companies. South Korea for example, has established itself as a centre of excellence for
manufacturing and technology and has over 50% of its GDP coming from exports of these goods. If you compare this to others in the region, then this is very high (China for example is 29%) and
these exports continue to grow. This has led to a rapid expansion of the middle classes and the establishment of names like Samsung, LG and Hyundai across the globe.
Commodities
As we have seen during the last few months, oil prices have been extremely volatile as we have seen a mixture of macro, political and production issues effect the trading level. What we know is that
stockpiles have decreased to a degree but given Iran’s ability to flood the market with a huge amount of cheap oil, this could increase and needs to be closely monitored. There has been significant
buying come back into the market at these low levels, seen by large open interest in the options market. This was not evident even a few weeks ago and so is a positive sign. In the commodity world,
we have seen that the fall of Chinese demand has resulted in many metals and minerals entering bear markets, and unless the PBOC decide to enter into a new period of infrastructure growth or
stimulate the building sector via low rates, then this shall remain low for the immediate future. There are also several issues in terms of the structural shape of the balance sheets of many of the
Commodity companies, much of which has been focussed on Glencore. It would not surprise us to see many rights issues and fund raising from this sector, which may add more volatility.
OCM Asset Management is a trading name of OCM Wealth Management Limited, who is authorised and regulated by the Financial Conduct Authority Number 418826.
OCM Wealth Management Limited registered in England No 5029809. Registered Office @ 3 Bouverie Court, The Lakes, Northampton, NN4 7YD.
Telephone 01604 621 467 - Web Address www.ocmwealthmanagement.,co.uk
Investor Newsletter & Market Commentary March 2016
Asset Allocation
“Other” as detailed in Analytics as an asset class, when derived from data from the different assets and
funds is classed as non-equity when inside non-equity funds and equity when inside equity funds.
OCM Asset Management is a trading name of OCM Wealth Management Limited, who is authorised and regulated by the Financial Conduct Authority Number 418826.
OCM Wealth Management Limited registered in England No 5029809. Registered Office @ 3 Bouverie Court, The Lakes, Northampton, NN4 7YD.
Telephone 01604 621 467 - Web Address www.ocmwealthmanagement.,co.uk