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Weekly Investment Update

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Summary

Next steps after the UK’s interest rate rise, the latest on our investment performance and Trump’s first anniversary

3 min read

Easy does it as Bank of England raises rates

Sterling slid and the FTSE 100 rose as the Bank of England (BoE) announced the first UK interest rate rise in over a decade. As we expected at Coutts, the central bank lifted the base rate from 0.25% to 0.5%, reversing the emergency cut it introduced following the UK’s vote for Brexit last year.

A rise had been priced-in by the markets. Higher than expected GDP growth, inflation reaching 3% – the bank’s target is 2% – and tight labour market conditions made it practically inevitable. It also followed months of ‘will-they-won’t-they’ hints from the bank, which led one MP to compare the BoE to an “unreliable boyfriend”.

Within our portfolios and funds, weaker sterling benefitted our international exposure while the FTSE bounce was good for our UK allocation.

The BoE’s cautious language about the future – with further rises coming “at a gradual pace and to a limited extent” – caused the drop in sterling. The bank’s governor Mark Carney has spoken of just two more rises in the next three years.

In our view this is a short-term fall and we still believe sterling will strengthen over the longer term. Following its dramatic drop following the European Union referendum, we see it eventually returning to something closer to historic levels.

Gilt yields tumbled on the interest rate news and we retain our view that they are poor value. We have held a low allocation to gilts for some time and, where we do hold them, had already shortened the duration to protect our portfolios and funds from rate rises.

“Within our portfolios and funds, weaker sterling benefitted our international exposure while the FTSE bounce was good for our UK allocation.”

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Robust investment performance from Coutts in October

Coutts portfolios and funds continued to perform well in October. A typical balanced portfolio was up 2% and has returned about 8% over the year-to-date. Generally, we continue to outperform our peers so far this year.

Key drivers behind this success include strong numbers in the technology and financial sectors as well as Japanese and emerging market equities – all preferred areas for us. Japanese equities, for example, were up around 6% over the month while emerging market stocks were up around 4%.

US banks reported solid earnings for the third quarter of 2017. Capital ratios are stable and interest margins are up. We believe the financials sector offers good value and will benefit if the Federal Reserve (Fed) follows through on the expected interest rate rise before the end of the year.

 

Trump chooses Fed chair as first anniversary approaches

This week marks a year since Donald Trump won the US presidential election. His latest act in the role was to name Jerome Powell the next leader of the Fed. The appointment does not mark a change of direction for the central bank and Mr Powell is likely to continue its approach of gradual interest rate rises.

President Trump might well hope to have more luck with his choice than he has had with many of his policies. He is still struggling to boost infrastructure spending, repeal Obamacare and relax financial regulation – three key moves that underpinned his election promise to “make America great again”.

But despite this, US economic growth remains solid and continues to drive positive economic momentum worldwide. Investors were most recently encouraged by strong Q3 earnings and the president’s tax reform proposals – boosting the S&P 500 to another record high and sending the Dow Jones Industrial Average to over 23,000 for the first time.

The US economy is expanding slowly but steadily, the manufacturing sector is in good health, consumer and business confidence is riding high and interest rates remain low.

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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