Conflicting central bank signals and a harder Brexit tone
September saw developed stock markets edge higher by around 1%, with gold and oil rising by just over 3%. Central banks dominated the headlines: the US wanted to raise rates but feared triggering a sell-off, the ECB had downgraded its forecasts but lost confidence in its own policy, the Bank of England thought further cuts were needed but data did not warrant them, and the Bank of Japan acknowledged that negative interest rates were not working.
Quiet gains give way to early-October volatility
Following a calm September, volatility picked up in early October. Prime Minister Theresa May used the Tory party conference to upgrade her definition of Brexit to "Brexit means hard Brexit." Fears that this would rule out participation in the EU single market, and therefore lead to a slowdown in growth, sent sterling plunging to a 31-year low whilst the main UK index briefly hit a new intraday high.
During September, stock markets edged higher with gains of around 1% in developed markets. Bonds fell slightly, with the exception of UK index-linked bonds, whilst gold and oil rose by just over 3%. Equities added a further 3% in sterling terms over the first couple of weeks of October.
Moving into October, reports, subsequently denied, that the European Central Bank were contemplating tapering off their bond purchases spooked the bond market. This, together with fears of Brexit-induced inflation in the UK, caused bond yields to rise, to +5 basis points on 10-year German bonds and back over 1% on similar UK bonds. Although still remarkably low, this represents a doubling of yield from the 50 basis points low back in August.
Four central banks, four different dilemmas
The US would like to raise rates but is scared of triggering a global sell-off. The European Central Bank has further downgraded its forecasts for growth and inflation but no longer feels confident in its current policy. The Bank of England thinks it needs to cut rates further but recent data does not warrant it. And the Bank of Japan announced a change from targeting monetary policy to dictating the level of bond yields, an old trick to help banks make bigger profits, and an acknowledgement perhaps that Japan's recent move to negative interest rates is not working.
Central bank policy is encouraging poor decision-making by investors: firstly in buying assets in the belief that prices will always be supported by central bank buying, and secondly in seeking income from investments without understanding that they might lose some or all of their capital.
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
Low forever borders on insanity
UK government bond yields currently imply that short-term rates will still be close to 0.5% in 30 years' time. Given that, as an industry, we struggle to accurately forecast one year ahead, this assurance of "low forever" borders on insanity.
In the aftermath of the Tory conference, the battle-lines for Brexit have clouded over with further ambiguity over the hardness of Brexit. It is not certain whether this is the result of in-party disagreements or some back-tracking by Theresa May filtered through ministerial briefings. Regardless, the fate of sterling and equities with overseas exposure will rise and fall with the politics.
Brexit apart, there is still plenty of confusion as to the state of the global economy. Despite a month of generally encouraging data, growth forecasts still have a downward bias. Clearly central bankers share this uncertainty and lack the confidence in global growth to tighten money supply. Discussions are turning to whether fiscal stimulus would be more successful in bump-starting the real economy, if necessary at the expense of investors.
For now, markets are supported by these factors; the many global concerns are known and therefore unlikely to shock. However, history shows that time and again complacency is punished, and we remain wary of a shock to markets at some point.
Bond yields imply that short-term rates will still be close to 0.5% in 30 years' time. This assurance of "low forever" borders on insanity.
We made no changes to our portfolios over the month. The rally across equity markets has been stronger than we anticipated, but we expect volatility to pick up heading towards the Christmas period.
Currency translation benefits
Our overseas holdings have continued to benefit from gains when translated back into a weaker sterling.
Bonds offer poor value; index-linked preferred
We continue to view fixed interest bonds as offering little reward for the risk of capital loss and prefer a combination of property, absolute return funds and equities. The recent plunge in sterling increases the likelihood of higher inflation, supporting our preference for index-linked stocks within the fixed interest sector.
Property and gold as diversifiers
Both the property funds that we invest in rose by just over 2% in September and confirmed that they will be lifting the suspension on dealing during October. Given the exuberance, and strong correlation, across other asset classes, we regard property, along with gold, as a useful diversification of risk.
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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