ECONOMIC DATA IMPROVES PUTIN'S 'WALL OF WORRY'

The Easter Week 2014 kept a balance between encouragement and disappointment. Encouragement came from the economic and company results, disappointment from global politics. Economic indicators from China to the US showed a pick-up of economic activity and corporate earnings after a disruptive winter in the Northern hemisphere. The once again increasing tensions between Ukraine and Russia ensured that investors didn't forget their concerns and worries about everything that can at any point go wrong and 'spoil the broth'.

Hopes that the Geneva Accord would bring a truce to the crisis were quickly crushed and the increasingly hostile environment does not bode well for a peaceful resolution of this stand-off. Judging by the muted market reaction, there appears to be an expectation that this is all a big game of chicken, in which Russia's president Putin is trying to bully the weaker Ukraine into concessions towards more influence and control by Russia of the heavily industrialised Eastern Ukraine. It isn't entirely surprising that this coincides with a notable economic slump in Russia's economy and a sizeable amount of nationalistic distraction is there-fore quite possibly intended. We continue to follow the developments around Ukraine closely, because a sizeable geopolitical upset has become pretty much the only event which could currently derail this recovery.

The continued rumbles around the Ukraine tensions are unhelpful, but need to be put in context, of a relative minority causing trouble in a post revolution power void, rather than a majority desperately seeking to break away and join Russia as was the case in the Crimea.
During our monthly Tatton investment committee meeting we deliberated at length on the developments of the first quarter and whether our central scenario of a pick-up of the economic recovery momentum has changed. The answer was a resounding 'no change' and so we have kept our portfolio allocations unchanged with only a few fund changes which have become necessary and opportune. The one area where we might introduce changes in the coming months is fixed income. With the risk of a severe deterioration of bond values dissipating as the yield and (low) inflation environment stabilise we are looking to reposition the Tatton portfolios to reintroduce their gilt 'stabilisers' as soon as is this makes good investment sense.

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MARKETS PROVE THEIR RESILIENCE AS UKRAINE FLARES UP

Equity markets have once again proved their resilience this week as tensions in the Ukraine flared up again on the news of a number of clashes involving pro-Russian and pro-Ukrainian forces. These events however, did not completely overshadow the positive economic news flowing out of the US and the UK, the two best performing economies in the world today.

Stock indices in the UK have remained largely range-bound. Over in the US, both the large cap-focused Dow Industrial and the broader S &P 500 saw solid gains on the back of some fairly decent corporate earnings reports, particularly within the healthcare sector, and some strong consumer spending data. The Dow bounced off key technical support levels early in the week to rally nearly 400 points – or 2.5% - later on as investors took some positive signals from the release of the latest US Beige Book. Overall, the core assessment of the economic conditions of the US were quite bullish, noting that growth 'increased in most regions' and that the labour market was 'generally positive'.

Retail sales across the US appear to be recovering, particularly in hardest-hit New York as weather conditions improved and consumers returned to stores. As we head towards the summer, we would expect that further progress looks likely given the solid rebound in the jobs market

The UK economic recovery reached another milestone this week on news that wage growth has now caught up with the rate of inflation and it appears increasingly likely that income growth could outpace the rise in prices in the near-term. We think that this could help provide a further boost to consumer sentiment, as people feel wealthier. This could therefore have a positive effect on spending patterns.

The Chinese also provided investors with more good news. China revealed that its quarterly GDP number beat expectations, which now extends their continuous run of market exceeding growth to over 10-years. There were some slight negatives within the data, suggesting a slightly softer patch of economic growth may be on the horizon. We would like to note that China is currently engaged in wholesale measures aimed at cleaning up its financial system and removing any systemic threats that could crimp its growth. We feel that investors should be mindful of those risks but that they should also remember Chinese leaders have rarely put a foot wrong in dealing with these threats and we believe rates of GDP growth of over 7% whilst simultaneously de-risking its financial system is mightily impressive.

The flaring up of tensions in the Ukraine acted as something akin to a dark cloud hanging over markets and by all accounts, the situation is serious and dangerously fragile. What do we think are the global economic and asset implications? We view these impacts as likely being more local than global. Despite the large size of Russia's economy, it has relatively limited integration with the world economy outside of supplying energy and natural resources, which could suggest that the global economic and asset implications, even for Europe, could remain limited. The impact on Russia itself could be somewhat larger, which enjoyed a generally promising outlook for 2014. Its fortunes may have already been temporarily derailed and financial assets have underperformed. The worst-case scenario, which includes a disruption in oil and natural gas deliveries, could potentially cause more economic and asset damage, but we feel it is likely that oil prices could fall rather than rise, suggesting that such a scenario could actually prove to be deflationary.

Overall, we see very little that would cause us to alter our investment views, even our longer-term positive stance on Russian equities. We remain happy with our current market positioning and we still see a very positive global growth story unfolding, particularly in light of the improvements seen in the US and British economies.

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MARKETS WOBBLE AS TECH SPECULATORS TAKE FLIGHT

What felt like yet another equity market correction in short succession, at Tatton we interpret this latest wobble more as an overdue refocus of investors on what fundamentally drives long term value in companies' stocks – their actual earnings and realistic future earnings potential. As the Q1 2014 earnings season kicked off against a backdrop of very subdued earnings expectations by analysts, investors seemed to lose their faith in the future earnings prospects of companies which had recently reached sky high valuations against their existing actual earnings. Bio-tech, technology and internet stocks lost heavily and dragged down markets overall. Particularly recent IPOs suffered and most fell below their stock market debut prices, which we actually welcome as a healthy warning to those speculative investors who were driving recent excesses. We believe that the refocus on fundamentals will stabilise markets and hopefully reduce the recent bouts of volatility for a more consistent market trend (more on this further down under separate heading).

Otherwise news flow was broadly encouraging with the IMF upgrading their 2014/2015 growth and stability forecasts, better unemployment claims figures from the US and buoyant UK consumer and corporate expectation surveys. We also noted with interest a joint initiative by the ECB and the BoE to finally de vilify the structured credit markets. These were undeniably at the centre of the 2008/2009 financial crisis, but I would argue for lack of proper legal structure and regulatory oversight, rather than systemic weakness. Compared to the US, Europe is only slowly catching up in their structural reform efforts to the finance sector, which still hampers the economic recovery. The US on the other hand has once again a fully functional credit sector after force-recapitalising its banks and reforming the structured credit markets, the European lending sector is still largely relying on refinancing from the ECB, the central bank.

The continued rumbles around the Ukraine tensions are unhelpful, but need to be put in context, of a relative minority causing trouble in a post revolution power void, rather than a majority desperately seeking to break away and join Russia as was the case in the Crimea.

During our monthly Tatton investment committee meeting we deliberated at length on the developments of the first quarter and whether our central scenario of a pick-up of the economic recovery momentum has changed. The answer was a resounding 'no change' and so we have kept our portfolio allocations unchanged with only a few fund changes which have become necessary and opportune. The one area where we might introduce changes in the coming months is fixed income. With the risk of a severe deterioration of bond values dissipating as the yield and (low) inflation environment stabilise we are looking to reposition the Tatton portfolios to reintroduce their gilt 'stabilisers' as soon as is this makes good investment sense.