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.
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