Whitechurch Asset Views - October 2017
September proved to be a mixed month for UK investors. Stockmarket performance proved to be broadly positive,but a strengthening of sterling acted as a headwind for UK investors with overseas exposure and many fixed interest markets showed losses due to concerns over the potential for rising interest rates.
The news headlines have continued to be dominated by Trump, North Korea, Brexit and European elections, providing a backdrop of political white noise for investment markets (white noise defined as: sound, especially of a loud, continuous, unpleasant kind, that seems to have no pattern or rhythm).
In 2016 it was seismic political events that were responsible for driving market sentiment; but it does seem that investors have become somewhat jaded with all the political noise and are beginning to realise that it is not the key driver for investment markets. We saw a little wobble mid-month when Trump and North Korea had another twitter argument and ‘rocket man’ fired another missile into the sea but investors soon restored their composure.
A Rate Rise on the Way
Central Bankers have taken centre stage and Government bond markets sold off in September, as investors took notice of the UK, US and European Bank governors expressing their intention to tighten monetary policies. UK gilts were at the forefront of the sell-off as Mark Carney indicated that the Bank of England (BoE) will raise interest rates if the economy continues on its current path. Overseas treasury yields also rose as the Federal Reserve (Fed) signalled it would step up its withdrawal of QE through a move from bond buying to bond issuance. Central Bankers have learnt their lesson in managing expectations and although bond markets are correcting, it has not been of the magnitude of the taper tantrum of 2013.
The potential rise in UK interest rates saw a rally on the pound and this acted as a drag on overseas earners and resulted in more domestically focused areas of the UK stockmarket performing better than exporting sectors. Overseas stockmarkets largely retained their upward trend, although we did see some performance dispersion. Domestically focused US shares performed strongly on potential tax reforms and Japanese and European stockmarkets were robust on stronger economic data. However, Asian and Emerging Markets were largely flat, both benchmarks finishing the month marginally down (in local currency terms), a reversal of the significant outperformance we have seen from these markets year to date.
The rebound in sterling also saw gains in overseas stockmarkets wiped out for UK investors and losses in many areas. For some time, we have been warning clients about the importance of currency on investment returns and September was proof of this. Although plenty of global indices produced positive returns in local currency terms, these were wiped out for UK investors by sterling strength – costing as much as 5% performance in several markets.
But Still Lower for Longer
Whilst the Bank of England could raise interest rates next month (sooner than markets had previously expected), our view remains that both at home and abroad any interest rate increases are likely to be cursory due to a lack of sustained inflationary pressure and economic growth remaining fragile. As a result, cash savings are going to remain meagre and will certainly show a negative real return this year, with savings accounts eroded by inflation.
This in turn should support investment markets and we believe that the benefits of remaining invested in a well-diversified portfolio are clear to see. Even with some equity indices reaching all-time highs there are still areas offering long-term growth prospects and attractive dividend yields. A well-balanced portfolio can provide many opportunities for those prepared to ignore short-term noise, focus on valuations and take a longer-term perspective.
However, with stockmarket performance being positive for such a sustained period this does mean it is important to not be complacent. Risk is of utmost importance in our investment approach and it is imperative to not get carried away by rising markets (the best performers in this environment are often those taking the most risk!).