While our portfolios benefit from the continuing market rally, Joe Batarseh covers the main market events and outlines the case for including emerging markets debt in our portfolios.
Our key messages this week are:
Central banks behave much as we expected
In a big week for central banks, the US Federal Reserve (the Fed) raised interest rates by 0.25% while the Bank of England (BoE) left rates on hold. Markets had been expecting both decisions, and they were in line with our own views of UK rates on hold and two to three rises from the Fed before year end.
The BoE decision saw the first split vote in eight months, with one of the nine Monetary Policy Committee Members voting for a rise. The hint of a more hawkish tone gave sterling a temporary boost against both euro and the dollar.
Our equity emphasis benefits from ongoing rally
Equities continued to rise almost across the board through the week, which was positive for our own modest equity overweight.
European markets reacted positively to the Netherlands parliamentary election which saw the anti-EU PVV fail to meet early expectations of electoral success and the more moderate VVD become the largest grouping in the Dutch parliament. Europe remains one of our favoured regions for equity investment and this result reduced perceived political risk in the upcoming elections in Germany and France.
The Fed’s decision to raise rates was generally taken as a vote of confidence in the US economy giving US equities a boost. Although we have a small underweight to the US on the whole, the rise was beneficial to our technology and healthcare equity themes, which have significant US exposure.
Emerging market debt looks promising
We’ve added exposure to emerging market debt (EMD) to all our portfolios. EMD offers attractive earnings from high interest rates, the potential to benefit from undervalued currencies and the opportunity for capital appreciation as local interest rates decline.
Interest rates in emerging markets are currently at elevated levels, as emerging economies have endeavoured to control high inflation. With inflation now largely in control we expect interest rates to fall. For example, in Brazil the interest rate increased from 7.25% in 2013 to a peak of 14.25% in 2016 but has been declining since.
This has two benefits for emerging market bonds. Firstly, they offer a higher income than bonds from developed markets, where rates are lower. In addition, as interest rates decline, the bonds will increase in value.
We also believe that emerging market currencies are likely to increase in value in the medium term. Having exposure to these rising currencies will provide further capital appreciation.
This position reflects two of our key investment principles. EMD offers good value in relation to the yield and the undervalued currencies, while also diversifying risk away from developed economies.
Past performance should not be taken as a guide to future performance. 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.
Senior Portfolio Manager, Coutts
Joe is a Senior Portfolio Manager in Client Investment Management and Wealth Structuring, having joined Coutts in 2011, and is responsible for running high net worth portfolios.
He has experience working with a number of client groups, including Middle Eastern, African and UK clients, corporate clients and resident non-domiciled investors.