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Weekly Investment Update

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Summary

Our views on how Yellen’s hawkish hints hit markets, Japan’s snap election and political risk in Europe

3 min read

Gilts tumble as bulls return from summer break

Federal Reserve (Fed) chair Janet Yellen struck a hawkish tone in a speech in Cleveland this week, warning against “moving too gradually” on monetary policy. Her comments caused the dollar to rise and bonds to fall.

The Fed’s move away from monetary easing – announcing that it will start rolling off its balance sheet in October and talking about another rate hike this year – was a factor behind an increase in risk appetite for markets after the summer.

That change in market mood has affected performance in gilts which fell 3% in September, eroding all the gains they had made this year. This has had very limited impact on our portfolios at Coutts as we are heavily underweight gilts – about 6.5% in a typical balanced portfolio compared to a benchmark of 25%. But our preference for corporate debt has done well – financial credit, for example, is up 7.5% so far this year.
 

Japan’s snap election should seal stability

Japanese Prime Minister Shinzo Abe called a surprise snap election. His hard line stance on North Korea and proposed tax reforms to support childcare, education and the elderly make it highly likely he will win – and that’s what markets are expecting.

“We continue to favour Japanese equities, which we believe offer better value than US stocks.”

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If he is successful on 22 October, it will mean continuity of Japan’s easy monetary policy and should be good for equities.

We continue to favour Japanese equities, which we believe offer better value than US stocks.


German election doesn’t move markets

As widely expected, Angela Merkel won a fourth term as Chancellor of Germany, but the election saw higher than expected support for the far-right AfD.

With the centre-left Social Democrats (SPD) saying they will now enter opposition – dissolving the “grand coalition”, the most likely coalition will see Merkel’s Christian Democrats (CDU) join forces with the Green Party and the liberal Free Democratic Party (FDP). This will be a first for Germany on a federal level and involve tough negotiations, but the more centre-right economic approach could be reasonably good for investors.

Merkel’s win is exactly what markets priced in and we have therefore seen no real impact on the economy or Coutts portfolios. Our positive view on European equity remains unchanged. Political risk in the region has retreated since the French election earlier in the year, although the Italian election, scheduled for some time in Q1 2018, may see further disruption.

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