Economic Commentary – April 2017

May 9th, 2017, by Georgina Ogilvie-Jones

The surprise announcement of a UK general election in June impacted financial markets in April. The FTSE 100 is now at 7,265 having started April at 7,323 and started 2017 at 7,142. All of our core UK equity fund choices outperformed the broad market in the last month, with their emphasis on quality companies, and limited exposure to cyclical areas, such as mining, proving beneficial.

Sterling has strengthened against the US Dollar from $1.24 at the beginning of the month to $1.28 by the end. This had a short term negative impact on the FTSE 100 due to the dominance of multinational companies in the index, which have overseas revenues and in some cases report and pay their dividends in US Dollars. The FTSE 250 fared better, with a total return of 3.8% across the month, due to the presence of many more domestically focused companies in the index. This underscores the importance of choosing funds which invest across the scale in terms of company size, which has always been our practice when choosing UK equity funds.

Currency movements also affected US equity returns when expressed in Sterling. The S&P 500 was down 2.4% in Sterling terms in April, although it had a total return of 1% when considered in US Dollar terms. This had a short term impact on our global equity fund choices, due to their exposure to the US.

We have discussed currency risk in many of our recent fund manager meetings. Short term currency risk is very difficult to predict accurately and studies indicate that hedging currency risk only tends to reap modest improvements to returns over time and there is no predictability as to whether it will be advantageous, or simply add to costs. We therefore prefer funds which either do not hedge currency, or which only do so on a limited basis. In any case, funds which have exposure to multinationals have a degree of “natural hedging” through the diversified geographical revenues and sophisticated treasury operations of these companies.

Read the full economic commentary here…