Losses compound as confidence fractures
A combination of deteriorating economic news and a few specific corporate upsets compounded stock-markets' losses from August. A wide spread of forward-looking data supported fears that the slowdown in emerging markets could lead to slower growth across the developed world. Over $40 billion left emerging markets in the third quarter as investors waited nervously for a rise in US rates that was expected to hit these markets in particular. Frequent attempts to rally shares were knocked back and talk of a bear market gained traction.
Inaction speaks louder than words
The US Federal Reserve's credibility took a blow when, despite having guided that they might be prepared to raise rates in September, they voted for no change, citing the turmoil in global economies. Rather than calming markets this inaction engendered fears that "things must be really bad," prompting further stock-market falls.
Ironically the eventual turnaround followed poor US employment numbers; the perception that any rate rises would be pushed further into the future renewed investors' appetite for more risk. In the UK, fixed-interest market rates now imply no rate rise until 2017.
A darkening picture from Beijing to Brasília
The worsening news flow was broad-based. Credit-rating agencies downgraded both Japan and Brazil; China posted its slowest fixed-asset investment growth for fifteen years; and the International Monetary Fund cut its forecast for global growth to just above the level generally associated with a recession.
Despite how we might feel when the monthly bills arrive, it is the lack of inflation that remains a worry. The official measure of consumer prices was unchanged on a year ago in the UK, whilst prices fell in both the US and the eurozone.
Corporate shocks and a flight to safety
Developed markets fell by a further two to three per cent, the exception being a six per cent fall in Japanese shares. Property continued to eke out small but steady gains and government bonds benefited from a flight to safety.
However, corporate and high-yield bonds suffered small losses as Volkswagen and Glencore soured sentiment already weakened by fears of default in the energy sector. Talk of a bear market gained traction, though frequent attempts to rally shares showed that buyers had not deserted the market entirely.
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
Bearishness sets the stage, but unresolved risks remain
After a tumultuous couple of months we would not be surprised to see a more positive market reaction; the level of bearishness makes markets ripe for a squeeze higher, but the extent and duration of any rally is harder to call.
If investors start to believe that interest rates will remain unchanged indefinitely then we could see a resumption of the search for income. In the UK, for example, fixed-interest market rates imply no rate rise until 2017; at the same time, shares in major companies like HSBC, Vodafone and GlaxoSmithKline are yielding five to six per cent.
Over the past few months emerging markets have suffered on fears that higher US rates would make their external debts more expensive to fund; if a rate rise is off the cards for now then it leaves scope for improvement in Asian and emerging markets.
However, it concerns us that all the macro issues that led to the recent sell-off remain unresolved. Several members of the Federal Reserve have been at pains to say that a rate rise before the year-end is not off the cards; it is only likely to be deferred for longer if a slowdown in economic growth becomes more evident, and that is unlikely to be good for stock markets. Fixed-interest bonds offer limited protection against rising rates at these levels. We think that prices might rise further in the event of weaker economic data, but the balance of risks favours low exposure to rising yields.
The level of bearishness makes markets ripe for a squeeze higher, but the extent and duration of any rally is harder to call.
Once again our funds held up well relative to the wider markets. This was due in part to our cautious positioning in less volatile sectors but also to good fund selection. In the current environment we continue to favour funds that rely on a consistent income stream rather than capital gains from rising share-price valuations.
Europe: stock selection proving its worth
Our recent selective investment in Europe held up well; despite a fall of over 3% in the STOXX Europe 600, the Jupiter European fund ended the month with a small gain.
Asia and emerging markets: resilience against the tide
In a similar vein, our holdings in Asia and emerging markets all produced small gains in the face of falling indices, demonstrating the value of active management in these more volatile regions.
Income and property over fixed interest
We remain underweight fixed-interest funds across the portfolios, preferring a combination of equity income funds, absolute return funds and a relatively high weighting in commercial property.
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.
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