The end of easy money comes into view
Central bankers changed the mood-music in June, with policy-makers across the US, UK, Europe and Canada all talking up growth and hinting at tighter policy ahead. Government bond yields rose, developed-market equities fell 1-2%, and UK shares dropped 2-3% as election turmoil compounded uncertainty. The US Federal Reserve raised rates by 0.25% and signalled the start of unwinding its quantitative easing programme.
Co-ordinated hawkish signals send bonds lower and equities off their highs
Central bankers changed the mood-music, resulting in a small rise in volatility. Investors were left guessing as to whether the move was co-ordinated as policy-makers in the US, UK, Europe and Canada all talked up growth prospects and hinted at monetary tightening further down the road. Government bond yields rose during the month and stock markets in developed countries fell by 1-2%. After hitting new highs, US stock markets ended the month slightly negative in sterling terms.
Shares in the UK fell by 2-3% as a shocking election campaign produced a lame-duck Prime Minister, acrimonious political in-fighting and no apparent policy on either running the country or negotiating its exit from Europe.
The Fed raises rates and prepares to unwind QE
The US Federal Reserve raised interest rates by the expected 0.25% and signalled the likelihood of one more rise before the year was out. Minutes from the meeting also confirmed that the board was preparing the ground to start unwinding bond holdings accumulated through the quantitative easing programme.
The story of the month was that accommodative central bank policies are approaching the end game. We feel, however, that it will be a long and cautious process, quite likely taking years rather than months, and that assumption rests on continuing economic growth.
Consumer squeeze intensifies as savings hit a record low
Despite UK employment being at a record high, there were growing concerns over consumers' ability to spend. Consumer spending accounts for around 60% of the UK's growth, yet retail sales barely rose over the year. Surveys by VISA and BBA reported a slowdown in consumer spending and borrowing respectively, and the official Household Savings rate fell to just 1.7%, the lowest since records began in 1963. This suggested that the recent consumer boom had been financed by running down savings or borrowing, both of which had reached extreme levels. As real incomes fell, the reining in of spending pointed to a further slowing of growth. Governor of the Bank of England, Mark Carney, had previously said that he was keen not to "punish" consumers further by raising borrowing costs.
Draghi's optimism sends bond yields higher before officials walk it back
The European Central Bank had a different case to answer. After years of disunity, the UK's decision to leave had united Europe in a desire to prove us wrong. Falling unemployment levels contributed to rising economic growth and record levels of business and consumer confidence in the leading countries, but with little impact on wage inflation. Against this backdrop, President Draghi's optimistic comments were taken as a sign that he was considering reducing the amount of monthly bond purchases, provoking an immediate rise in bond yields. This contrasted with comments earlier in the week where he had rejected calls for monetary tightening, and ECB officials subsequently signalled that the market had "misjudged his latter comments".
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
A long and cautious process, but markets look fully valued
Despite the change in central bankers' rhetoric, markets moved little overall. By recent standards bond yields showed a sharp adjustment, but most stock markets remained close to their recent highs. We could not be sure whether policy-makers were being deliberately ambivalent or whether they genuinely did not have a clear view but felt the need to say something. The US Federal Reserve was more consistent in its approach to a gradual tightening process, but both the Bank of England and European Central Bank occasionally talked tough while looking more like closet doves.
Several members of the Bank of England's Monetary Policy Committee had well-documented concerns about the effects of Brexit-related uncertainty on the economy, currently supported by a slower (election-related?) June, but the question remained as to how much inflation they were prepared to tolerate.
Markets continued to look fully valued and in need of a correction, but the need for income could still drive prices higher in the meantime.
Accommodative central bank policies are approaching the end game, but we feel it will be a long and cautious process, quite likely taking years rather than months.
We made several changes during June, reducing property exposure and adjusting our bond and equity positioning to reflect the shifting outlook.
Reduced property exposure by around 50%
We reduced our exposure to property funds by around 50%. Depending on the portfolio's risk category, the proceeds were re-invested in a money fund, an absolute return fund or equities.
Switched into short-duration credit
With 10-year bond yields stabilising at around 1%, we switched the additional bond fund bought in January into the Royal London Short Duration Credit fund. This fund will offer more protection if yields rise whilst still providing some income. Subsequent to the switch, UK bond yields rose to 1.3%.
Asian equity and biotech additions for higher-risk portfolios
Our higher-risk portfolios saw a switch from the Newton Asian Income fund into the Guinness Asian Equity Income fund, which was now available to us, together with a purchase of the AXA Framlington Biotech fund.
New investment-trust allocation
We bought the Unicorn Mastertrust fund across most portfolios. This is an unconstrained fund that invests in investment trusts.
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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