Focusing on Fundamentals as the Fed continues to be busy doing nothing

The world's focus in August was undoubtedly drawn east to the market turbulence in China; this month the world's gaze is firmly back in the West. The eagerly anticipated decision by the Fed on whether or not to raise interest rates held people's attention on the US, whilst the more recent news on Volkswagen's emissions scandal brought all eyes onto Europe. All this has rather over shadowed yet another general election in Greece, making it five in six years and closer to home, the election of a new opposition leader.

US Rates and the global picture

Along with the rest of the world, we watched and waited for the outcome of the FED's two day meeting to decide whether to increase interest rates for the first time since the start of the financial crisis.

Domestically there is a strong argument that the US economy is ready for higher rates. But given that rates have remained at a record low since the end of 2008, the first hike will be a significant shift in policy stance and a sign that policy makers are confident the economy can withstand a very gradual tightening in policy.

Confidence was clearly lacking in September. Worries about the impact a stronger dollar and lower energy prices on inflation weighed on the committee's decision. On top of this, financial market turmoil emanating from China continues to raise risks to the global economic outlook. Although the US is not directly heavily exposed to China, the indirect effects are of more concern given that China is now the world's second largest economy.

For interest rates to be increased for the first time in over 9 years, we needed to have seen signs that the financial problems in China are settling down, that the dollar and oil prices are stabilising, and that the labour markets are improving. But the big question that remains is whether other economies, particularly emerging markets, are ready for higher US interest rates. Some economies have made good progress since the "taper tantrum" of 2013, but at the same time those economies with high levels of external debt could find it difficult to finance if they were to suffer significant capital outflows.

The macroeconomic environment will continue to be dominated by the timing of interest rate rises. Although equities have a history of being adversely affected at this stage of the cycle, we believe that the timing and extent of interest rate moves is unlikely to result in a market shock. However, it re-emphasises our belief that these factors should not be the key drivers in our stock selection process. We continue to look for well-managed companies with strong sustainable fundamentals and robust business models that will perform throughout the economic cycle.

Volkswagen's "Diesels Dupe"

Markets and consumers were left reeling when the US Environmental Protection Agency accused German carmaker Volkswagen of using a device to cheat emissions tests on diesel cars, leading VW to admit it had found "emissions discrepancies" in 11 million diesel cars. Scandalous as this sounds, the impact will be much more real as the reputational damage done to a brand at the heart of German manufacturing, spreads to the country as a whole. It is concerning that BMW and Volvo have also been dragged into the scandal. The auto industry accounts for roughly 20 per cent of Germany's exports, and employs 775,000 people. Investors with European funds could suffer from the share price fallout which has seen VW's share price fall by 28% in the last week

The silver lining of what's rather a dark cloud is that the lessons learnt should result in better enforcement of, and adherence to, emissions regulations globally, and more responsible behaviour from the world's largest motor manufacturers.

Within the portfolio of the Trust, we do not hold any car motor manufacturers. We have preferred to invest in companies that support the sector. We expect that the relentless downward pressure on vehicle emissions should benefit companies such as Johnson Matthey, which is one of the ways in which the portfolio gains exposure to the sector.

Companies to watch

Last month I spoke about two companies that we are particularly excited about, one of which was Novo Nordisk. This stock remains of particular interest as it returned over 33% in the 12 months to 25 September. During what is a particularly volatile period, we look for companies that are beneficiaries of long-term themes, and that can manage themselves through economic cycles. Novo Nordisk core business is the treatment of diabetes, they are a global business leader with 47% of the total insulin market. It is a great example of a company that is focussed on producing what society needs, and it is doing well because of it.

A second noteworthy holding is Equinix, which is up 35% in the 12 months to 25 September, a company that is working at the forefront of interconnectivity and cloud computing, a fast changing industry of increasing importance within businesses around the world.

An update on holdings

Over the last month, we have made a number of changes to the portfolio. We have added ARM Holdings, a Cambridge based semi-conductor IP leader. ARM has strong structural growth drivers, as their energy efficient semi-conductor chip architecture technology becomes increasingly established, and as technology pervades consumers' everyday lives more and more, ARM is well placed to benefit. This was funded from selling down Aberdeen Asset Management, BASF and Computershare.

Launch of UN Sustainable Development Goals

Towards the end of September we saw the launch of the Sustainable Development Goals (SDGs) by the UN. They are important because they are a globally agreed set of seventeen goals for all humanity. They range from ending poverty and hunger to reducing inequality and providing peace and justice. It is refreshing that development is described in terms other than simple progression of GDP, because we all know that while the economy and business is important it is not all encompassing. Nevertheless the SDGs do recognise the important part that investors and companies can play in delivering them.

This fits with the ethos behind our investment philosophy. We believe that certain companies are part of the solution to sustainable development. That companies providing products in healthcare, energy efficiency, pollution control, and healthy nutrition will be successful and profitable precisely because they are benefiting society. And that by providing capital to these companies investors are helping to accelerate the transition to a more sustainable economy.

So we welcome the launch of the SDGs and see clear parallels between them and our four themes of Climate Change, Sustainable Consumption, Quality of Life, and Resilience. Moneyfacts Investment Life and Pensions Awards.

On 16 September, the annual Moneyfacts Investment Life and Pension Awards were announced. Alliance Trust Investments was Highly Commended in the category of Best Ethical Investment Provider and Alliance Trust Savings was Highly Commended for its Junior ISA product. The awards are made on the basis of the views of the ILP Moneyfacts research team and Moneyfacts magazine's readers and recognises those companies and individuals who have consistently delivered premium products, service and innovation in the last 12 months.

Good Money Week

Looking forward, next month will see the UK Sustainable Investment and Finance Association's 2015 Good Money Week. The week campaigns to raise awareness of sustainable, responsible and ethical finance in order to help individuals to make good money choices. Alliance Trust is a proud sponsor of Good Money Week, and works to support the campaign by running a number of sustainable investment roadshow events around the UK and online. The events are a great opportunity for those attending to hear from and speak to our Investment Managers. I will update you further on our activity at Good Money Week in next month's blog.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.