Investment Comment October 2017

Despite some volatility amidst signs of political and economic uncertainty, markets remained overwhelmingly positive in the third quarter. The S&P 500 (+3.96%), Dow Jones Industrial Average (+4.94%) and Nasdaq 100 (+5.89%) all saw strong gains in dollar terms, offset partly for Sterling investors by an appreciation of the pound against the dollar. The Top UK 100 Companies (+0.82%) and UK All Companies (+1.74%) continued to show volatility, with both indices falling c.3% over the first two weeks of September before staging a recovery towards the end of the month. Emerging markets performed strongly, with the Brazilian Bovespa (+18.11%) the standout performer in both local currency and Sterling terms. In Europe, the Borsa Italiana (+10.26%) led, with the majority of EU peers showing strong gains as economic data continued to impress.

In the UK, inflation – as measured by the Consumer Price Index – rose to 2.9% in August, up from 2.6% in July. The rise was above expectations, and was driven primarily by rising clothing and petrol prices. Retail sales grew much faster than anticipated in August, up 2.8% compared to the same period in 2016. Continued consumer spending growth in the face of falling real wages has prompted concern amongst policymakers. The Bank of England Financial Policy Committee, the ‘FPC’, ordered banks to increase their capital buffers by £10bn to protect themselves from potential losses on consumer credit. The FPC mandated the increased prudence in the face of what they describe as a ‘pocket of risk’ in an otherwise stable environment.

The rise in inflation provoked increasingly hawkish comments from the Bank of England Monetary Policy Committee, ‘MPC’. A majority of MPC members articulated that they believed that it would be ‘appropriate to increase rates over the coming months’. Gertjan Vlieghe, a former economist at the hedge fund Brevan Howard, known to be one of the more dovish members of the MPC, changed his rhetoric this month in remarks to the annual conference of the Society of Business Economists. These developments triggered an appreciation in sterling, which hit a one-year high against the dollar of $1.36 on 15 September.

In Europe, the run-up to the German election attracted less attention than many may have expected at the beginning of the year. Whilst Chancellor Angela Merkel’s Christian Democrat-led bloc did emerge as the largest party, their share of the national vote – alongside that of the centre-left Social Democrats – fell to its lowest level since 1949. This left the populist rightwing Alternative for Germany – ‘AfD’ – with a higher than expected share of the vote as Merkel conceded that her refugee policy had ‘polarised’ her country. The result broke the euro’s recent run of strength, causing a 0.9% drop against the US dollar, although the euro remains +11.8% year to date.

Despite political uncertainty, eurozone economic conditions and expectations remain strong. The European Commission’s official economic sentiment indicator climbed to its highest level since June 2007 in September, with industrial, retail trade and construction firms all more optimistic. Standard & Poor’s restored Portuguese sovereign debt to an investment grade rating, leading yields on 10-year bonds to fall below 2.5% – a far cry from the >16% seen at the height of the bloc’s sovereign debt crisis.

In the US, mixed inflation data has not prevented the Federal Reserve from preparing the market for further interest rate rises. Janet Yellen warned that ‘moving too gradually’ could risk an overheated labour market, preparing commentators for a further rate rise before the end of the year. Economic data remains relatively strong overall, but the full economic impact of recent natural disasters remains unknown.

In Asia, tensions over North Korea have not impacted a fundamentally strong economic picture. Japan’s core consumer price index climbed to its highest level of the year in August, supported by strong growth in the cost of fuel and medical care. The Chinese renminbi hit its highest level in 21 months in September after a largely uninterrupted rally year to date. The People’s Bank of China scrapped two trading restrictions that had been intended to discourage short-selling of the currency in a signal that the central bank had become less concerned about the threat of a sharp depreciation.

Brent Crude prices rallied sharply in the first three weeks of September, hitting a high of over $59 a barrel, a level not seen since June 2015. Prices were up over 30% since June after better than expected growth numbers in Asia combined with a tightening in global stockpiles and geopolitical concerns. Prices have dropped back since the peak on 26 September, as fears surrounding Turkish President Erdogan’s comments on the Kurdish independence vote appeared to ease.

Gold prices have been volatile, rising >6% in August as tensions between the US and North Korea rose. September saw gold drop back towards July levels as the investors moved away from the ‘risk-off’ trade.

September was an uninspiring month for equity markets, but overall the third quarter continued to provide positive returns. We recommend that clients maintain geographically diversified portfolios to offset the impact of changing economic conditions. With inflation at current levels, the cost of being out of the market should be considered seriously. We remain positive on the prospects for global economic growth despite the potential for continued political uncertainty.

Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.