Investment Newsletter - May 2015

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Investment Newsletter May 2015

A Complex Relationship Mike Deverell Investment Manager

For some time we’ve been predicting volatility around the election time. We certainly saw it, but not for the reasons we thought! We were expecting a period of uncertainty after the election as we naively believed the opinion polls! As we know, the polls were very wrong and we had a decisive victory for the Conservatives. On Friday after the election the FTSE, which had dropped almost to 6,800 on election-day morning, bounced back 2.2%. However, this probably had little to do with British politics. For example, the Eurostoxx 50 index of continental European companies rose 2.6% on the same day. The dip in markets prior to the election and the bounce afterwards is in fact mainly to do with the bond market. In Europe in particular we have seen some unprecedented moves.

Around six months ago, it became clear that the European Central Bank (ECB) was about to launch quantitative easing (QE). It wasn’t formally announced until January but markets had already reacted by then. Since then, European markets in particular have been acting strangely. One guiding principle of constructing a portfolio is to choose assets that are lowly correlated with each other. In other words, assets that will do well at different times. For example, if the stockmarket is down, your fixed interest portfolio should hopefully hold steady or even make money. Quantitative easing has pushed correlations between asset classes closer together, and that worries us. QE works by the ECB buying up government bonds, which pushes the price up and the yield down. In theory, investors then invest this money elsewhere (such as

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission.


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