On Wednesday, George Osborne gave his update on the economy, pointing out that growth was stronger than the country’s main rivals but noting that further cuts will be needed in the years ahead to get the UK’s finances back in order.
Thursday saw the ECB’s monetary policy meeting, where its president Mario Draghi maintained the central bank’s current stance but hinted that it could start to buy government bonds early next year. Over the weekend, we will look at European funds for cautious and aggressive investors.
We’ve rounded up our favourite stories of the week below. From all of the FE Trustnet team, have a great weekend.
1994 crash nothing compared to the “devastation” that will unfold in 2015, says Eigen
The bond market faces an incredibly tough 2015, according to Bill Eigen, manager of the $8.5bn JPM Income Opportunity fund, who says he is the more nervous now than at any other point in his 24-year career in fixed income.
Although bonds have surprised many with their strong performance in 2014, Eigen believes that many parts of the bond market are ready to crash as yields have been distorted by central banks to point where they no longer reflect economic realities.
Performance of indices in 2014
Source: FE Analytics
“We are getting to a point where it is really dangerous in the bond market. It’s not funny anymore. I look where rates are, I look where economic fundamentals are and I look what central banks have done to these markets and I am the most nervous I have been in my career,” the manager told FE Trustnet.
Eigen is backing this view up by holding close to 60 per cent of his absolute return fund in cash, as he expects the bond market to “violently react” when the Federal Reserve starts to lift interest rates in the US from their lows.
What the 2014 Autumn Statement means for your investments
Wednesday saw chancellor George Osborne deliver his Autumn Statement, where he presented his update from the 2014 Budget and announced a few new measures that could impact investors’ portfolios.
UK housebuilders and airlines were among those coming out on top, after Osborne surprised with an overhaul of the stamp duty regime on buying a new home and scrapped the air passenger duty for children under 12.
Banks and multinationals came out less well, however. The chancellor made changes to the tax relief applied to banks, capping how much past losses can be offset against future profits, while a tax on profits made in the UK then moved offshore will affect some tech giants and other foreign business active here.
ISA savers were also winners, Not only was the tax-free limit lifted from £15,000 to £15,240 from April next year, but spouses or civil partners will inherit ISA tax advantages when their partner dies.
Stephen Ford, head of investment management at Brewin Dolphin, said: “If you are drawing income from an ISA in retirement, suddenly discovering that income is no longer tax-free when your spouse dies is a huge blow. This allows people to plan properly and fairly for their old age.”
Why John Chatfeild-Roberts is avoiding mid cap funds
Even though mid-caps have endured a tough ride in 2014, FE Alpha Manager John Chatfeild-Roberts expects them to continue to underperform large-caps in 2015 and is avoiding them as a result.
Performance of indices in 2014
Source: FE Analytics
Chatfeild-Roberts, who manages Jupiter’s Merlin fund of funds range, expects mid-caps to take a significant hit as central banks raise interest rates from their near historic lows over the medium term.
“When there is significant monetary easing the FTSE 250 seems to do well and then when you start to get tightening it tends to pull back. Our expectation is that you will get more outperformance from the larger caps,” he said.
The manager has been selling out of mid-cap heavy funds over the course of 2014, arguing that buying deeply into mid and smaller-cap companies when credit is tightening could spell disaster if liquidity starts to dry up.
How to take the emotion out of market timing
Many investment decisions can be compromised by emotion, as fear makes investors reluctant to buy at the bottom of the market but then greed stops them from selling when valuations are close to peaking.
Steven Andrew, manager of the M&G Episode Income fund, says that it is possible to avoid this sort of predicament by deciding well in advance at what price you are willing to buy or sell an asset - then sticking rigorously to that value.
“When you’re amid a bout of volatility ... it is important that you have some kind of investment philosophy that tells you where value sits, because that tells you how you should behave in that period,” he explained.
“If the market decides to offer you a 10 per cent or 20 per cent discount on prices, you need some kind of anchor that you can hang on to so you can say ‘is this a good deal, or is it going to be a permanent loss that the market is changing its verdict on in terms of valuation?’”
Andrew adds that it is important to come to these decisions “outside of the chaos”, otherwise investors will find their minds clouded by emotion if they attempt to make them in the middle of a bout of volatility.
