March 2012 Inflation Plus Commentary
The fund returned -2.15% in March, failing to outperform its RPI benchmark which rose by 0.38% in a month where returns varied across most asset classes.
US equity allocations (S&P 500, Networking and Technology and Small Cap ETFs) and the German Mid Cap ETF produced positive returns, whilst emerging market and Asia Pacific holdings suffered small losses. Credit returns were also mixed with euro zone positions performing well relative to the US. The recently established position in oil also continued to perform strongly finishing up 2.4% over the month.
Equity allocations were reduced early on in the month, as we sold our position in European Banks and decreased exposure to the ETF tracking the German Mid Cap (MDAX) Index.
Some profits were crystallised by removing the Corporate Bond ex-Financials ETF and reallocating across Norwegian and Australian sovereign bonds as investment grade credit spreads had contracted over previous months. A new allocation of c.4% was also made to a 7.5% Republic of South Africa 2014 Bond yielding 6% at the time of initial purchase.
Market Commentary
Despite mixed economic news, March was another month where investors seemed to be willing to take on more risk. The US continued to lead the way, building on the momentum from the first two months of 2012 while all things European were treated with added caution.
US equities were one of the strongest performers in March, with the S&P 500 index up 3.1%. UK and European equities lagged behind as the FTSE All Share index finished down 1% and the FTSE Europe (ex UK) index was flat. Emerging markets also trailed, ending 3.3% lower amid concerns that China's manufacturing sector appears to be slowing. Finally, in a further sign that more investors are becoming less risk averse gilt yields rose for a second consecutive month.
In the UK, Chancellor George Osborne announced his budget for 2012, outlining more spending cuts in a bid to further cut the UK deficit. This, together with another month of rising oil prices (Brent Crude finished up 1.1% for the month and 15.5% for the quarter), will further increase the squeeze on household spending, already suffering with retail sales having fallen 0.8% in February. Despite this, modest GDP growth is expected for the first quarter of 2012 with help from manufacturing which expanded at its fastest pace for ten months in March.
In Europe, after months of negotiation it was announced that Greece had managed to avoid a disorderly debt default thanks to a second bailout and a write off of over 50% of privately held debt.
Whilst investors welcomed the announcement as well as the news of the second tranche of the European Central Bank's long-term refinancing operation at the end of February, the optimism was short lived. Data released for March suggested that the €529bn operation may not have been enough to prevent the European economy from shrinking in the first quarter as the manufacturing sector contracted for an eighth consecutive month. This, coupled with another month of rising unemployment, served as a warning that despite an otherwise positive start to the year, a European recovery is still a long way off as it continues to flirt with a further downturn.
Meanwhile, signals from the US economy were increasingly positive as another month of encouraging data publications reinforced the view that it is leading the developed economic recovery. Fifteen of the nineteen largest US banks passed Federal Reserve stress tests which helped to boost confidence in the US banking system. The manufacturing industry is seen to be bolstering the economy, with data suggesting activity accelerated during March, along with manufacturing employment reaching a nine-month high. Total employment figures however were seen as disappointing as only 120,000 jobs were added in March following three consecutive months of 200,000 plus jobs, demonstrating that, although the US seems to be ahead of the curve, it is still heavily susceptible to the faltering European economy.
Returns are in local currency.