QUARTERLY REPORT FROM INTERNATIONAL WEALTH ACCOUNTS LTD April 12,2016
Stock market developments Quarter 1, 2016
The US S&P 500 Index of the 500 most important shares in the United States ended up 1.3% for the quarter. The valuation of American shares is still not very high considering the low interest rates and the fact that several indicators show the economic recovery continuing. The increase in interest rates in December triggered a weaker market at the start of the year. The United States, like several other stock markets in the world, had a very weak start of the quarter but rebounded strongly. The strongest sectors were Telecom, Utilities, Materials and Consumer Staples. Health Care and Financials were the weakest sectors. For the quarter, it was a huge spread between the sectors, from +16.6% in Telecom to -5.5% in Health Care.
In Europe, the MSCI Europe ex-UK was down by 6.9% during the quarter, partly due to the currency. The European Central Bank announced more monetary easing in March that increased the hope that Europe is recovering. The unemployment rate has been falling steadily in Europe and several other indicators still show signs of a possible sustainable recovery even if the consumer confidence is falling.
In UK, the equity market recovered from earlier sharp losses and the FTSE all-share index ended the quarter up by 0.2%. The recovery of oil and other commodities helped the market to regain hope for better profit in many big companies. The Brexit referendum at the end of this quarter is holding back some investors from the stock market
In Japan, ended the first quarter down by 12.5% losing the gains from the strong fourth quarter last year. Japan is still in a fragile situation and the strong currency is one reason that the export is contracting and the consumer sentiment is decreasing again. The government continues to stimulate the economy in the hope of raising the consumption and get the economy going.
The MSCI Asia ex-Japan was up by 1.8% (in USD). The earlier worries for China’s slower growth rate did not affect the sentiment much this quarter.
The MSCI Emerging Markets ended the quarter at +5.8%, recovering some of the big declines last year. After last year’s heavy price falls in several commodities, which are crucial for many emerging market countries, there was a sharp rebound during the first quarter this year.
Helped by the rising commodity prices, Brazil made a spectacular come back and was up 28.6% even if its credit rating was downgraded to non-investment grade recently. Russia was up 15.8%, also helped by the recovery of the oil price. Several emerging markets are still attractively valued, but it is important to be selective both in the choice of markets and companies in order to avoid negative surprises.
In Sweden, the OMXS30 Index was down by 5.6% for the period. The market opened the quarter with a sharp decline but recouped partly as commodities and other stock markets in the world regained earlier declines. Private consumption, home purchases and public investment are expected to continue to be key drivers for the economy in the climate of negative official interest rates as the central bank is trying to raise inflation. The total GDP, (not per capita) growth is very strong, sparked by spending on the record high amount of immigrants. The risk for an economic backfire is obvious as many of the immigrants, due to low education will be a financial burden on society instead of an asset helping out an aging population.
We do not believe a negative interest rate is a sound way to run an economy as it weakens the currency and builds up asset bubbles in housing and stock markets. This is new territory which creates uncertainties. Uncertainties always temper consumption and investments as many people take a wait-and-see attitude. In March, the market ran into a positive trend again. We are selective in our investments and are following the markets closely. We are focusing a lot on companies that can profit from the digitalisation which is affecting many sectors and companies a lot.
The Brexit referendum and Greece debts are the most important issues for the second quarter. We see a vote for Brexit as a good way to disarm the EU bureaucrats and believe that UK will gain a lot on a Brexit in the long run even if there might be some turbulence in the short time. The power of the bureaucrats in EU will be reduced which will make it easier for European countries to compete with USA and Asia without all the regulations and red tape.
Greece is a never-ending story with little hope for a sustainable solution before they get their own currency back and do not have to regulate their economy by mass-unemployment especially among the youth, which is a recipe for a long-term disaster for any country or region.
The campaign for the president election in USA continues and affects the markets. One of the reasons for the weak Health Care sector is critics about the high price policy from drug companies. New upcoming taxes and closings of tax loopholes are also worrying several big companies.
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