Whitechurch Asset Views - November 2017
October proved to be a good month for investors as virtually all asset classes gained in value. Despite rhetoric from Central Bankers dominating the headlines, generally global equity and bond markets both ended the month in positive territory, whilst energy and commodity prices made material gains also. The only blots on the landscape were Emerging Market debt and the gold price, both of which lost value over the month.
Pretty much all global stockmarkets posted gains across the board in October. Although the UK appears to be one of the most unloved equity markets amongst global asset allocators it still managed to produce modest gains for investors across the market cap spectrum. Overseas markets did fare better and UK investors in the US benefited from the dollar strengthening against the pound, although the euro weakened versus the pound diluting returns for UK investors in European markets. Japan was the best performing Developed Market, with investors buoyed by Prime Minister Abe’s resounding election victory and, therefore an ongoing commitment to loose monetary policy and structural reforms.
Asia Pacific and Emerging Markets reversed some recent declines and were a bright spot over the month, outshining their Developed Market counterparts in terms of performance – Japanese equities excluded. These markets have had an exceptional 2017. There are clear indications that corporate earnings growth is returning to these regions and relative equity valuations mean they remain an attractive opportunity for investors with a longer-term perspective.
Bank of England raise the rates
The big news at the start of November was the Bank of England (BoE) decision to raise base interest rates by 0.25%, the first rise in UK interest rates for a decade. The decision came as no surprise given that BoE Governor, Mark Carney, had strongly hinted early last month that rates might rise due to higher inflation and robust economic growth.
Despite this telegraphed move in UK rates, 10-year UK gilt yields surprisingly narrowed over October. But this masks the full story, as inflation and interest rate speculation has seen UK gilts post negative returns year-to-date. This has been good news for our portfolios as we have been avoiding UK gilts on valuation grounds for some time, favouring specialist corporate bond and globally diversified bond funds for our fixed interest exposure, as well as allocating to other asset classes, such as our recent move back into commercial property.
Even though we have now seen US and UK rates move higher we don’t see bond prices collapsing given our view that the economic climate supports a lower for longer environment. Furthermore, monetary policy guidance from the Central Banks has been upfront with plenty of lead-in time for markets. With economic growth fragile, political uncertainty and inflationary pressure likely to subside, we see little scope for material or incremental rate increases in the UK or other major economies for that matter.
Opportunities over the longer-term
As a result, cash savings are going to remain meagre and are likely to show a negative real return next 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 having been 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).