Global Market Overview
Asset classes produced mixed returns in September with most equity market eking out positive returns whilst government bond prices declined. The MSCI World index rose a modest 0.23% with the UK, US and Japan providing positive returns which were offset by Europe and Emerging Markets where investor sentiment continues to be negative. The best performing market was Japan where the TSE Topix index rose 2.7% in sterling terms despite a 2.7% decline in the value of the yen versus the pound (in other words, the index advanced 5.55% in local currency terms).
The US economy continues to boom with US consumer confidence surveys hitting their highest levels since 2000, whilst unemployment fell to the lowest level since 1969. The National Federation of Independent Business’s survey also demonstrated the highest level of optimism amongst small businesses since the survey began in 1974. In response, the US Federal Reserve raised rates in September, the eighth increase since 2015 and the third this year. The rise pushes the Fed’s rate above 2% for the first time since 2008 and more hikes are to be expected into 2019 as interest rates are “normalised”. Over the 3rd quarter US equities significantly outperformed other regions with strong earnings data overshadowing concerns around the escalating US-China trade war.
In the UK, the market continued to be weighed down by fears of a no-deal Brexit with the more international FTSE 100 outperforming the FTSE 250 index in September which is home to more domestically oriented companies. Over the quarter both indices were in negative territory and sterling also weakened against the dollar and Euro. A number of fund managers we have spoken to recently have pointed out that the UK stock market is now very cheap on a global basis and certain sectors are exceptionally good value, especially if an 11th hour deal with Europe is cobbled together. Growth has recovered from the slowdown seen in the first quarter (remember the Beast from the East?) and we are starting to see M&A activity indicating that global corporates are perceiving value, for example the offer from Coca-Cola for Whitbread’s Costa coffee chain.
Europe continues to produce positive but fairly sluggish growth, consistent with the ageing demographic profile of the region. Domestic consumption, supported by falling unemployment has held up well but there is some weakness in the manufacturing sector from a sharp slowdown in exports to China. This could be alleviated by Chinese efforts to support domestic demand. Italy continues to dominate the headlines with a proposed deficit of 2.4%, within the EU’s 3% threshold but higher than some had anticipated. There has been no change to the European Central Bank’s policy of keeping interest rates of hold “at least through the summer of 2019”.
In Japan the re-election of Prime Minister Abe as head of the ruling Liberal Democratic Party, paving the way for him to remain as the country’s leader for another three years, was positively received, especially by foreign investors. Company profits have continued to improve and trade tensions with the US eased somewhat with the deferral of any decision on higher auto tariffs.
Asia and Emerging markets continue to be plagued by US dollar strength and the US-China trade dispute, although there was quite a lot of divergence within the indices with China and Turkey underperforming whilst some countries such as Thailand and Mexico did well.
Most major sovereign bond yields rose as the US Federal Reserve raised interest rates in line with market expectations on the back of positive economic data. As one would expect against this back
drop, high yield bonds, which because of their higher yields are less sensitive to interest rates, outperformed.
The oil price rose in September (+4.11%). In sterling terms, it has risen 44.96% over one year driven by sanctions on Iran and supply constraints within the US shale pipeline. These are expected to ease once infrastructure comes on stream next year, but the oil price may yet rise further in the interim.
Performance of RPW Models over one month to 30th September 2018
All RPW models declined modestly over the month.
Performance of RPW Models Year to Date to 30th September 2018
All RPW Models have made gains so far this year.
Performance of RPW Models over 1 Year to 30th September 2018
Over one year to 30th September 2018, the Adventurous model has returned 10.86% and the Cautious model 2.14%. (Source: Financial Express Analytics, Total return, Gross of fees, as at 30th September 2018).
Please note that these figures are unaudited and indicative. The performance of actual client portfolios may be different. The effect of fees will reduce the returns achieved.
The best performing fund over the month was Legg Mason IF Japan Equity (+2.88%) closely followed by Schroder Tokyo (+2.6%). iShares 100 UK Equity Index (+0.47%) and Man GLG Undervalued Assets (+0.37%) scraped into positive territory as did L&G US Index Trust (+0.11%) and L&G UK Property (+0.09%) along with the two cash funds, Fidelity Cash and Royal London Cash Plus. All other funds declined over the month with Baillie Gifford the worst performer, falling 3.34%, reflecting reduced risk appetite for Emerging Markets.
Another choppy month in September and some fairly significant declines so far in October with the MSCI Emerging Markets index down 7.05% and FTSE World Europe ex UK index down 6.39% but it’s not yet clear if this the start of a sustained correction or just more of the volatility that has characterised 2018 and which was entirely absent for the whole of 2017.
Investor sentiment is jittery and cash levels are quite high. The consensus view seems to be that an economic downturn is likely in 2020 but that, meanwhile, global growth, fuelled by the US, remains strong and more emerging market economies are now growing than at any point since the financial crisis of 2007/8. Risks of a policy error by central bankers trying to unwind quantitative easing abound but, in the US, at least, it seems to be working and the Federal Reserve is moving back into a position where they will have firepower to stimulate a slowing economy when it comes. In general, consumer confidence is high, underpinned by rising wages which have started to increase slowly but not yet threaten inflation levels. As many have said we must be closer to the end of the cycle than the beginning but valuations are not yet excessive and some areas such as the UK are offering good value. Moreover, in the UK, the interest rate that is achievable on most cash deposits is still well below the rate of inflation and so for those investors who are willing to take the risk and who wish to preserve their purchasing power it makes sense to invest in the markets.
In any event, trying to time market corrections remains highly contentious. It can be all too easy to sell and feel briefly smug but timing when to buy back is another matter altogether. Maintaining a diversified portfolio that is consistent with a client’s longer-term attitude to risk and capacity for loss with a disciplined approach to asset allocation with regular re-balancing is what underpins long term wealth creation.
Volatility is likely to persist and investors should continue to maintain diversified portfolios with a blend of defensive and more risky investments. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
11th October 2018