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Market Update

Financial markets around the world have remained relatively stable, although the sharp post-Brexit rally cooled somewhat in September given remaining political and economic uncertainty.

The MSCI AC World Index posted a gain of 1.3% (in sterling terms), while bonds generally fell. Global investment grade corporate bond indices posted a 0.3% fall (in sterling terms), while gilts dropped by 2.4% and US Treasuries were nearly flat with a 0.1% drop.

The UK economy appears to be getting on with business as usual while waiting for Brexit negotiations to begin. Unemployment continues to fall, consumer spending is buoyant, and business activity has been strong, particularly in the services sector.

Domestic UK equities recovered strongly from their post-Brexit selling, and commercial property has regained some of its composure. However, the pound remains depressed owing to the remaining uncertainty about the economic outlook.

While the FTSE 100 reached new highs for the year and the S&P 500 set a new record, political uncertainty remains a risk for equities in the short term. The temperature has increased in the US presidential campaign between Donald Trump and Hillary Clinton, and populist anti-austerity and anti-immigration parties are gaining ground in Europe.

Having cut rates to a record low of 0.25% in August, the Bank of England left them unchanged in September as the economy appeared to weather Brexit uncertainty. Conversely, the US Federal Reserve opted to hold fire on a rise given some soft economic data.

Having reached new record lows in June and July amid vigorous easing measures in the UK, gilt and other major government bond yields drifted higher (prices lower) over the month. Ten-year US Treasury yields also continued to drift higher and the German 10-year yield, which dropped into negative territory in late June, was marginally positive by the time of writing.

Our analysis suggests the outlook for world equities remains positive, and we continue to favour Europe and Japan, given their relatively attractive valuations compared with other major markets. Though we see ultra-low-yielding government bonds as expensive, we don’t anticipate significant weakness given expectations for interest rates and inflation to remain low in developed markets.

Investment grade (higher credit quality) corporate bonds have performed well this year, and we believe they still offer attractive additional yields relative to government bonds.

While UK commercial property still faces some headwinds we believe that concerns over a post-Brexit exodus are exaggerated and it offers reasonable value.

  • Developed and Emerging Equity Markets

    Developed and emerging equity markets

    Equity Markets Performance

    As of: 31-Sep-16 Current -1M -3M YTD 15
    Developed Equity (MSCI) 1,306 0.5 3.3 4.3 2.6
    FTSE All Share 3,697 1.9 9.0 10.5 1.0
    FTSE 100 6,782 1.7 10.1 12.1 -1.3
    S&P 500 2,171 0.1 4.1 7.8 1.4
    Nasdaq Composite 5,213 1.2 5.7 5.0 7.0
    DJ EuroStoxx 326 1.3 0.2 -2.7 11.1
    Nikkei 225 16,887 2.0 -1.8 -10.3 11
    Hang Seng 22,977 5.2 12.5 8.1 -3.9
    Emerging Equity (MSCI) 48,425 2.8 9.0 11.1 -3.9
    BRIC (MSCI) 524 4.6 11.9 10.7 -5.3
    Source: Datastream Performance shown as % total return in local currency terms

    Bond Markets

    As of: 31-Sep-16 10-Year Yield* -1M -3M YTD 15
    US Treasuries 1.57 -0.7 1.5 3.6 -1.6
    UK Gilts 0.64 2.8 10.6 15.6 -2.3
    Eurozone Government Bonds -0.13 -0.8 2.6 4.6 3.4
    US Investment Grade   -0.2 2.7 6.6 -5.6
    US High Yield    1.7 4.3 11.4 -10.1
    Emerging Market   2.4 6.2 11.8 20.6
    Source: Barclays indices; Datastream

    *current yield on benchmark 10-year Treasury, gilt and bund respectively

    Performance shown as % total return in local currency terms

    Commodity Markets

    Performance (%, dollar)
    As of: 31-Sep-16 Current -1M -3M YTD 15
    Commodities (TR) 167.1 -1.8 -2.9 5.6 -24.7
    Brent Oil Price (Spot) 46.1 11.4 -5.9 26.7 -33.5
    Gold Bullion (Spot) 1308 -3.1 7.7 23.1 -10.5
    Industrial Metals (TR) 295.8 -4.1 5.6 7.4 -26.9
    Source: Datastream  
  • Inflation & Interest Rates Current Inflation (%) Interest Rate Forecasts (%) Rate Announcement
    Current Nov Dec '16 Next Date
    United States 0.8 0.50 0.50 0.75 02-Nov
    United Kingdom 0.6 0.25 0.25 0.25 03-Nov
    Eurozone 0.2 0.00 0.00 0.00 20-Oct
    Japan -0.5 -0.10 -0.10 -0.10 31-Oct
  • Fed holds fire as data softens

    Markets rose after the US Federal Reserve (Fed) held off on raising interest rates at its September meeting. While most commentators weren’t expecting a rise just yet, the confirmation helped US shares gain about 1% on the day.

    The fact that other major equity markets gained between 1-2% on the news and the overall MSCI World was up 1% reinforces our view that markets are being led by the US economy. We maintain a positive longer-term view on equities, although we have been trimming our overweight exposure in recent months as rising valuations are now pricing in this positive outlook.

    There have also been some signs of softening in US economic data recently. The US economy added 151,000 new jobs in August, below the consensus forecast of 180,000 and well down on July’s 275,000 gain. Meanwhile, the purchasing managers index (PMI) of services activity fell to a six-year low of 51.4 in the latest reading, while the manufacturing PMI slipped to 49.4. A figure below 50 suggests slowing activity.

    Inflation has also remained subdued, falling to 1.1% in August from 1.6% in July, giving the Fed some additional breathing space before committing to an increase in rates.

    All this has no doubt contributed to the Fed’s hesitance in raising rates, with Chair Ms Yellen noting that “The economy has a little more room to run than might have been previously thought.”

    The vote was split this time around, and we think a rate rise at the next meeting in December is likely. That would be exactly a year since the first Fed hike in this cycle took rates from their record low of 0.25% to 0.5%. 


    UK assets have recovered, but sterling remains depressed

    Most UK assets fell sharply immediately following the surprise vote to leave the EU, led by the FTSE 250 index of domestically focused midsize companies and  UK commercial property. The UK currency also bore the brunt of the selling, and remains the only UK asset yet to recover from the shock.

    In the three months since the result, the FTSE 250 has recovered all of its lost ground and gone on to reach new highs for the year. The initial falls reflected fears that Brexit would lead rapidly to economic stress that would hurt domestically focused businesses.

    However, in the event, consumer spending has remained high, boosted in the summer by tourists taking advantage of the low pound, and employment has stayed steady.

    Doubts about the final shape of Brexit are still weighing on the property sector, though fears of a mass exodus of services companies from London seem to have eased. There is still no clarity on the UK’s access to the European Union free trade area, and in particular ‘passporting’ rights allowing access to EU markets for financial and other services firms based in the UK.

    While concerns could continue to suppress performance of UK commercial property (performance shown on the chart is for the Legal & General UK Property Fund as indicative for the sector), we remain positive on the long-term outlook and are maintaining our holdings at this time.

    Similar worries are keeping sterling bound in the region of $1.30 for the time being. This is its lowest since the mid-1980s and well below the broad $1.40-$1.80 range it has tended to trade in since then. We believe sterling will move back towards the middle of this range in the medium to longer term as the details of Brexit are clarified.

    In the meantime, we are taking profits from foreign currency-denominated holdings that have benefitted from the currency effect and using the proceeds to switch to sterling based assets, which we believe will benefit when the pound bounces back.










    Emerging markets


    Our outlook for global equities remains broadly positive, based partly on our view that robust US demand and spending will continue to support global growth and earnings. In the UK, the internationally-focused FTSE 100 has stayed buoyant following its post Brexit recoveryas investors anticipate a boost to overseas revenues from sterling weakness. 

    We have taken advantage, though, of the recent strong run in global equities to take some profits and reduce our pro-equity position further. By early September, for example, the MSCI World index was up nearly 20% from its February low. 

    Within equities, we continue to favour Europe and Japan, given their relatively attractive valuations compared to other major markets. Both also have more encouraging profit outlooks, coupled in Europe with signs of recovering economic growth and company profitability.




    Investment grade


    High yield


    Emerging market debt


    While expectations for interest rates remain lower for longer across the major markets, we still see government bonds as generally expensive. The EU referendum result pushed aside any chance of UK rate rises in the near future, and we believe monetary policy is likely to remain loose for a long time. The US Federal Reserve, meanwhile, has indicated that a rate rise may be on the cards late in 2016, although the pace of further rises is likely to be slower than anticipated earlier in the year.

    At the height of the sell-off in risk assets in February, investment-grade bonds (higher credit quality) – led by the bonds of financial institutions – were pricing in a global recession, which we still see as unlikely in the near future. At the time, we added to holdings in financial debt and investment-grade bonds in general. These positions have performed well, and continue to offer attractive additional yields relative to government bonds, providing more than adequate compensation, in our view, against the risk of default.


    Commodities = Energy +
    Absolute Return + Technology +
    Property + Banks =
    Dividend Income +    

    We have maintained a neutral stance on oil prices, which continue to be volatile. We still see oversupply as a problem while demand is growing very slowly.

    UK commercial property took a major blow after the EU referendum, fuelled by fears of multinationals leaving the UK due to their access to EU markets being cut off. Some funds were forced to suspend redemptions temporarily and many marked their assets down, though most have now recovered much of their lost ground. While the sector faces some headwinds, we believe these fears are exaggerated and that UK property remains a desirable asset globally, and are holding on to our positions.

    We continue to look out for bond-like alternative assets that have a low or negative correlation to equities and can mitigate the risk of large falls in equity markets. Some examples already in our portfolios are absolute return strategies, which have the potential to make money through most market environments, and strategies for gaining exposure to dividend income while minimising correlations with price moves in equities.


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The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

Past performance should not be taken as a guide to future performance.

In the case of some investments, they may be illiquid and there may be no recognised market for them and it may therefore be difficult for you to deal in them or obtain reliable information about their value or the extent of the risks to which they are exposed. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Investments in emerging markets are subject to certain special risks, which include, for example, a certain degree of political instability, relatively unpredictable financial market trends and economic growth patterns, a financial market that is still in the development stage and a weak economy.

The information in this webpage is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. Nothing in this material constitutes investment, legal, credit, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you.

The information in this webpage is believed to be correct but cannot be guaranteed. Any opinion or forecast constitutes our judgment as at the date of issue and is subject to change without notice. The analysis contained in this document has been procured, and may have been acted upon, by Coutts and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither Coutts nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such information, opinions and analysis.

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