A growing wave of unsettling events
Markets had to contend with a remarkable confluence of risks this month. In addition to the geopolitical wobbles in Ukraine and the Middle East, Portugal's largest bank collapsed, the EU voted to back the US with tougher sanctions on Russia, a spate of corporate earnings failed to meet expectations, and fears grew that US interest rates might rise sooner than expected. Russian and European stockmarkets were hardest hit, yet emerging markets delivered a stellar month and gold continued to perform well.
Contagion fears grip Europe as sanctions bite
The failure of Banco Espírito Santo sent shockwaves through European markets. Portugal fell by 13% on contagion fears, while Russian and European stockmarkets were hardest hit more broadly, with falls in the region of 5–7%. The EU's decision to back the US with tougher sanctions on Russia added further pressure to an already fragile sentiment picture.
Bond yields continued to fall across Europe as fears of deflation persisted. German bunds hit a record low of 1.12%, whilst Italian and Spanish bonds both fell to 2.5% — remarkably, on a par with the US and UK. In our view, yields still remain too low to compensate for the risk of capital loss, and the collapse of a Portuguese bank sent shivers through the market, prompting a rare fall in high-yield prices.
The Dow touches 17,000 before surrendering its gains
Strong employment data sent the Dow Jones index to a record high above 17,000, but a lot of good news had already been priced in. The market ended the month nearly 600 points lower as a sell-off reversed all of the summer's gains. Stronger economic data suggested that perhaps the previous weaker growth numbers were weather-related, raising the prospect of earlier rate rises.
The US Federal Reserve cut monetary stimulus by a further $10 billion a month and signalled an expected end to quantitative easing in October. We remain cautious on valuation levels in this market; it has hit repeated new highs, and the late-month reversal was a reminder of how quickly sentiment can shift.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
The UK growth story holds, but the FTSE looks tired
We are happier to believe in the UK growth story than in most other economies. There is a greater consistency of economic data pointing towards an expanding economy with, as yet, few signs of inflationary pressures. We expect this momentum to build going into the general election next May.
However, the FTSE index is currently looking tired and was flat over the month. For now there is technical support at the 6,600–6,700 level, but the greater risk lies in a more meaningful correction. We would look to use such an opportunity to buy shares at lower levels.
In contrast to the woes of most developed markets, emerging markets had a stellar month with gains of 2–4%. We continue to prefer the value in emerging markets to developed markets, although we recognise that this differential has tightened over the past few months. Our gold funds also continued to perform well, gaining around 3% on the month, supporting our view that gold has bottomed and is a sensible long-term hold.
Bond yields still remain too low to compensate for the risk of capital loss
On our lower-risk portfolios we continue to prefer a blend of equity income, property and absolute return funds to fixed interest assets. In equities, we generally favour the defensive qualities of income funds over growth funds.
Reducing high-yield exposure
During the month we reduced exposure to high-yield bonds, switching into a fund with higher credit quality and less exposure to rising interest rates. The collapse of Banco Espírito Santo prompted a rare fall in high-yield prices, reinforcing our caution.
Trimming equities, including US
Towards the end of the month we slightly reduced our equity exposure, including our weighting in the US. For most funds we switched into a less volatile absolute return fund, but on the higher-risk funds we increased the holding in property.
Emerging markets and gold remain favoured
Our emerging market holdings were among the top performers, rising by 2–4% over the month. Our gold funds gained around 3%, supporting our view that gold has bottomed and is a sensible long-term hold. We continue to prefer the value in emerging markets to developed markets.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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