Whitechurch Asset Views September 2016 - Monthly review and approach to global stockmarkets and asset classes
August was another good month for risk assets, with the US equity markets hitting new highs during the month largely bolstered by continuing expectations of accommodative global monetary policy. The Bank of England set the tone at the beginning of the month by announcing a 0.25% cut in interest rates, as well as further gilt and corporate bond purchase programmes.
UK stockmarkets reacted favourably to the Bank of England’s (BoE) response to any Brexit repercussions for the UK economy. Domestically focused areas of the market, particularly in small and mid-caps, were at the forefront of the rally. However, with interest rates being cut further, the hunt for yield intensifies and so we expect dividend paying areas of the market to be the main beneficiaries going forwards.
Across the pond, US stockmarkets hit record highs during the month but ended up being broadly flat at the end of August. Economic data may be looking robust, but markets look relatively expensive and corporate profits remain tepid on the whole. Janet Yellen, in her speech at the US Economic Symposium at Jackson Hole, intimated that the prospect for a US interest rate hike by the end of the year was back on the agenda, which tempered investor appetite.
European and Japanese stockmarkets had a relatively quiet month but both regions’ equity markets moved higher. We continue to favour exposure to these markets, as the European Central Bank (ECB) and Bank of Japan (BoJ) remain supportive, whilst both regions’ equity valuations do not look stretched, especially compared to the US. All eyes will be on policy, as the ECB and BoJ meet in early and late September respectively. Both Central Banks are expected to retain their accommodative monetary policy with the BoJ expected to take further action.
Asia Pacific and Emerging Markets continued their strong run in August and generally outperformed their Developed Market counterparts. Positive Chinese economic data over the month helped underpin these markets, although investors will be looking towards US interest rate speculation and the strength of the US dollar, both of which can act as significant headwinds for these markets.
The environment of loose monetary policy meant that bond markets also enjoyed a positive month, as prices moved higher. Further monetary stimulus from the BoE saw gilt yields compress further, whilst long dated bonds such as index linked gilts produced double digit returns over August! Despite speculation that the US will raise interest rates by year-end, the lower for longer rate environment remains. However, with over $13.5 trillion of global sovereign debt trading on negative yields, the hunt for yield will see support for higher risk areas of fixed interest markets, such as corporate bonds.
Whilst markets are ‘making hay whilst the sun shines’ at the moment, it is important not to become complacent. As the Bank of America Merrill Lynch Fund Manager Survey highlights, manager “fear has yet to flip to greed” but cash levels have dropped sharply. Furthermore, the VIX index, which measures volatility of US shares and is widely known as a benchmark for investor fear, recently hit its lowest level year-to-date. We are mindful that sentiment seems somewhat complacent despite the continued global economic and political uncertainty.
Click through to read the full report; where we discuss our approach across global stockmarkets and other asset classes, as we look to extend our award winning performance in 2016.