Investment Note August 2015

Black Monday: Time for a performance check

“The stock market is the only market where things go on sale and all the customers run out of the store” – Cullen Roche, Author and Investment Manager 
Stock and bond markets have been very volatile in the last couple of days with wild swings around the world. The problem is reported as having started in the Chinese stock market which was down 8.5% on its own “Black Monday” but spread dramatically to the rest of Asia, Japan and all other markets both developed and emerging. 

There can be no better illustration of Monday’s confusion than looking at the share price movement in Apple, the world’s largest publically held company. Caught up in the global sell off that was particularly hard on technology stocks, shares in Apple opened in New York down 13%, dropping to $92, wiping a whopping $80 billion off the value of the company.  Later, if you were lucky enough to be tuned into a CNBC TV show slot called “Mad Money” you would’ve been treated to the unlikely scene of show host, the energetic Jim Cramer, flourishing an email from Apple CEO, Tim Cook, who had emailed the show with a reassuring and unmistakably upbeat update on Chinese sales of iPhones. Shares in Apple shot up into positive territory to $106 – an unprecedented move.  Incidentally, there is now a regulatory question over whether the email was “fair disclosure” having been an unscheduled mid-quarter update.  But that’s a matter for another day.

What we would like to do today is bring you up to date with our own unscheduled, and equally positive, update to performance over the last 12 months.  Over this period, nearly all of our clients are in positive territory across all risk mandates despite the significant drop in the FTSE All Share index of 10.3% (as of Tuesday morning i.e.: after Monday’s global falls):

Defensive - all portfolios up between 1-2% 
Cautious – all portfolios up between 1-2% 
Balanced – all portfolios up between 1-2%
Growth – all portfolios up between 1-2%
Adventurous – all portfolios up over 2%

The shorter term relative performance against the mixed benchmarks has been even better over the summer months which has been characterised by heightened market volatility throughout.  Much of the performance has been achieved through the allocation to stock picking strategies that have typically avoided the downturn in banks, oil and mining which has been a particular characteristic of the UK.   But well timed investments into Europe, despite the obvious eurozone concerns, have also made a positive contribution.  

This is a fast moving market environment and, as we write, the People’s Bank of China has just cut interest rates for the fifth time, a -0.25% cut down to 4.6%.  This was looking increasingly unlikely ahead of the global central banker’s summit in Jackson Hole, Wyoming, on Thursday.  Particularly as the Japanese Finance Minister, Mr. Aso, ruled out any response from the G7 to the stock market volatility.  Indeed, this morning’s Shanghai Securities News quoted a PBoC academic saying that the Chinese central bank would not cut to support the stock market. Perhaps he can be forgiven on such a confusing and volatile day.

But these things happen. Perhaps history doesn’t always repeat itself but it does rhyme, and as members of the TAM investment team have lived through every crash including 1987, this correction seems unusually devoid of any new news. After all, the slowing of the Chinese economy should come as a surprise to no one.  Furthermore, we are more inclined to appreciate the positive aspects such as falling commodity prices which will keep a lid on inflation and policy loose for the benefit of us all. Indeed, in many respects China, and its role in the world, resembles Japan of the 1990’s.  In that regard we confess to having a wealth of experience of having endured a decade of investing in Japan’s post bubble crash which was particularly unrewarding.  Japan’s problems were pretty much confined to Japan while the rest of the world boomed.  We may find that, despite the events of the past couple of days, something similar happens with China’s relatively closed capital markets.

In the meantime, as we stated earlier in the year, we stand ready to make tactical changes should the opportunity present itself and if we believe that the investment justifies the risk. 




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