August Commentary

From the perspective of equity investors, the last 6 months has seen values generally holding steady, all of this reflecting the ongoing impact of low interest rates and improving company results.  In this last respect, we are now well into the time of year when companies report interim results to the end of June: the picture being painted is mixed, combining a number of good announcements with others that are more mundane, the latter often citing the strength of Sterling as a factor putting pressure on profit margins.  Generally, dividends are often being increased a little further and while the pace of progress in this respect has slowed down, the cumulative impact of dividend increases since 2010 has substantially bettered inflation.  While equities are perhaps not as obviously cheap as they were say 5 years ago, we continue to believe that they offer sound value from the point of view of the medium and longer term investor seeking to protect and grow value against inflation or to achieve growing dividend income over time and the impact of current geopolitical troubles – which have held markets back – perhaps provide an opportunity to add funds.

Fixed Interest markets continue to represent something of a conundrum.  Interest rates will surely begin to rise, albeit in modest steps, over the next few years, a process that will be accelerated if inflationary pressures were to show signs of re-emergence.  On this basis, Fixed Interest investment looks set to be unable to protect capital value in the way that it has over the last decade or more while interest rates have been drifting lower.  On the other hand, investors keen to see reasonable income and who wish to balance out the potential volatility of equity funds, should continue to use the fixed interest market particularly where it can be done tax efficiently, in for example ISAs and pensions.  Interestingly, over the last 6 months, against the background of potential interest rate rises that may commence relatively soon, the total return on typical index linked gilt funds, on corporate bond funds and indeed on UK gilt funds has been slightly positive although clearly some individual funds have fared better than others.  To my mind, this sector still has a role to play for high income investors who are aware of the risks and for investors with a more balanced approach using this sector to diversify their portfolios.

In summary, we have for some while now sought to tilt portfolio balance towards equities where income constraints allow.  I do not see this broad view changing for the foreseeable future.