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Weekly Investment Update

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Summary

Why inflation can be good for our portfolios, market reaction to US bank results and the latest from China

1 min read

UK inflation hits five-year high

UK inflation has reached its highest level in more than five years, climbing to 3% in September from 2.9% in August. Increased food and transport prices were large drivers behind the uplift.

The change further increases the chances of the Bank of England (BoE) raising interest rates in November, reversing the emergency rate cut that followed the vote for Brexit last year and bringing interest rates back to 0.5%. Brexit negotiations are still causing uncertainty for markets and the BoE will not want to do anything to put the economy at risk.

Higher inflation is usually good for our portfolios and funds because of our preference for equities and property over bonds. Inflation is generally positive for equities and can help to maintain the real value of wealth because companies are able to pass on rising costs to consumers and maintain their profit margins.

 

Markets expect more from US banks

US banks have started reporting their financial results for the third quarter of the year. So far they have been pretty solid but the reaction of markets was mixed largely because expectations were already high.

“Higher inflation is usually good for our portfolios and funds because of our preference for equities and property over bonds.”

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Generally, capital ratios are stable and interest margins are up. Trading revenues are down compared with the same period last year but that’s not a surprise as a low volatility environment, like the one we are in right now, usually means less trading activity.

Financials are a key sector in all our portfolios and funds, reflected through our credit and equity positions. We believe the sector remains good value and offers potential benefits if interest rates rise – which is expected by the end of the year in the US.

 

No surprises from China congress

The 19th congress of China’s Communist Party started last Wednesday. The main aim of the event is to choose the people who will be governing China for the next five years. About 400 people in total will be elected to various positions.

We do not expect any surprises from the week-long congress. Chinese president Xi Jinping remains very much in charge of the country and is likely to consolidate his power.

It appears the president and his supporters feel that the balance between state and markets is more or less right in China, so there are no major market-oriented reforms looming.

Coutts currently has a neutral exposure to China relative to our long-term investment strategy, as part of our allocation to emerging markets as well as a country-specific fund that is likely to benefit from rising domestic consumption. We see the prospects for China as broadly positive and no reason to change our view at this stage.

Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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