Monthly Market Report - July 2015

24th June 2015

With commentary from David Stevenson

Financial markets seem to be behaving in a rather bipolar, manic manner, one part excitable, another part deeply worried and fearful. Many commentators, including yours truly, seem to be obsessed with bubble hunting, with Chinese equities top of most lists followed by government bonds, biotech stocks and possibly US equities a distant fourth. More generally, some cautious investors are beginning to worry that the scramble for yield is having unpleasant side effects especially as it ripples through those parts of the stock market based on dividend paying equity income stocks. One concrete example comes in the shape of the hugely successful Woodford Patient Capital investment trust, managed by the eponymous Neil Woodford. The last time I looked, this brand new fund was trading at 112.3p, well above its issue price of 100p. Bear in mind that this premium is based on a fund that is yet to be fully invested and will invest in a combination of dividend producing blue chip equities and risky early stage businesses not producing an income. I have no doubt that it is potentially a wonderful strategy, by a manager with a proven track record but does it really deserve a 12% premium to book assets as an investment trust? And just in case one thought that this was an isolated example, feast your eyes on Gervais Williamsí new investment trust called Miton Micro Cap. This fund is also managed by an excellent manager and is also trading at a near 10% premium to book value just weeks after its listing. Not bad for a fund that is investing in riskier micro small caps.

Yet despite all this excitement, investors have also been grappling with noticeably increased volatility within the fixed income markets and the ever present risk that the Greeks may yet fall out of the Eurozone. In fact, volatility is slowly creeping up across the board, albeit in a very gentle manner. Investors are also honing in key markets such as Japan, which are in turn benefitting from sharp currency depreciation. A freefalling yen might prompt an all-out currency war with everyone looking to push their rates lower, with sterling possibly the last man standing. Lurking in the background of this currency battle is China, which is being hit hard by the Yen's depreciation, struggling with its own internal slow down, and eager to push deflation out globally to its partners as its local businesses fight for market share. Obvious risks seem to be looming on the horizon yet many of the putative bubbles mentioned earlier seem to be getting bigger by the day.

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