It was a terrible month for the pound and there was plenty of news from the US election to keep investors occupied. That said, suffering sterling did have the effect of raising returns on diversified portfolios, raising the performance on PortfolioMetrix Portfolios to all time highs during the month.
October’s focus for UK investors was the pound, which fell to its lowest level against the dollar in 30 years over fears around the UK’s Brexit strategy. The US presidential election, which continues to throw up unpleasant surprises, also loomed large in investor thinking.
Sterling had an abysmal month. Starting the month at almost 1.3 to the dollar, at one point it experienced a mini-flash crash intra-day to down below 1.18, before closing the month at 1.22. This was due to the market interpreting the speeches at the Conservative party conference early in the month as indicative of a harder Brexit than previously expected. Prime Minister Theresa May confirmed that she intends to invoke article 50, beginning the process of quitting the European Union by the end of March 2017 and implied that control over immigration would take precedence over access to the single market. The weaker currency did, however, have the effect of causing the FTSE 100 index (which has about two thirds of its revenues in international currencies) to a new intra-day high during the month. In the bond space, UK 10 year gilt yields rose sharply over the month from 0.75% to 1.25%.
In terms of UK data, inflation began to rear its head surging from 0.6% in August to 1% in September, its highest rate for almost two years. UK growth, on the other hand, was a much better than expected 0.5% over the third quarter, slowing from a 0.7% expansion over the second quarter but better than the 0.3% consensus figure.
For a change, US monetary policy took a back seat with investors more focused on the US election coming up on 8 November, although the minutes of the September Fed meeting released in October did highlight the decision to leave rates unchanged in September was a ‘close call’, raising the chance of a December rate rise. The political bombshell announced at the end of the month that the FBI was reopening its investigation into Hillary Clinton’s email server revived Donald Trump’s campaign. Meanwhile, economic growth gathered pace in the US during the third quarter, growing at an annualised 2.9% during the period against a 1.4% rate in the second quarter.
Eurozone data was positive, with growth post the Brexit vote a resilient 1.6% annualised, the same as in the second quarter. The ECB left rates unchanged at their October meeting.
Japanese equity markets were spurred upwards due to a weakening yen and news that sentiment amongst large companies measured by the quarterly Tankan survey remained broadly steady (although service sentiment was weaker than that of manufacturers).
It was a grim month for the pound, as it fell against most other currencies. It was down a whopping 6% against the dollar, 3.6% against the euro, 2.5% against the yen and 7.8% and 8.4% against the South African rand and Brazilian real respectively.
Currency was again the main driver for the month, as the weaker pound boosted overseas assets that were largely flat or down in local currency terms.
Japanese equities performed well in both local and sterling terms whilst Emerging Market equities performed well in sterling terms as emerging market currencies strengthened.
Fixed income performed poorly on the back of rising government yields, particularly Global Sovereign Bonds and hedged EM bonds. Rising yields also dampened yield sensitive Global Property, although the fact its biggest weighting is to US property (priced in dollars) was helpful to UK investors.
It was a challenging month for active fund performance overall. Aberdeen Emerging Market Bond fund outperformed, down 0.5% vs the index’s 1.4% fall but other positions fared less well.
Jupiter European had an extremely tough month, down 0.5% against the index’s 3.8% gain as certain core holdings, including Novo Nordisk and Syngenta fell sharply on the back of softer growth estimates and M&A uncertainties respectively. That said, the fund is still ahead of its index by a healthy 14% over 3 years. Man GLG Continental Europe was also slightly behind benchmark, up only 2.2%. Liontrust Special Situations and Miton UK Value Opportunities were down 1.4% and 2.2% vs the FTSE All Share’s 0.6% gain as small and mid-caps underperformed the FTSE 100 on the back of weaker sterling. Somerset Emerging Market Dividend Growth and Schroder Small Cap Discovery, up 5.3% and 5% respectively were also slightly behind the MSCI EM’s 6.7%’s rise due to their quality bias which underperformed value.
Absolute fund performance was on the whole strong. Old Mutual GEAR was up 1.7%, Jupiter Absolute Return up 1.6%, Invesco GTR up 0.8% and Premier Defensive Growth up 0.6%. Detractors were Old Mutual ARGBF down 0.4% and Threadneedle UK Absolute Alpha down 0.3%.
Performance was again strong over the month, although a falling again pound most definitely flattered sterling performance.
Weaker bond performance and strong absolute return fund pick performance meant that Absolute Oriented outperformed Core Active.
Relative performance was again solid over the month, with the 10 balanced funds we track regularly up on average 1.6% over the month with the highest performing up 3.1% and the weakest down 0.8%.
Overall, Core Active 6 outperformed 4 of these 10 competitors.
Brexit: UK Growth, Sterling & Inflation
It is fair to say that on the whole, UK data has been more positive than expected post the EU referendum vote. Far from collapsing, the first print of third quarter growth was a solid 0.5%, better than the expected 0.3% figure, and the Bank of England has raised its growth forecasts for next year from 0.8% to 1.4%. The reasons for this is mainly down to robust consumption by UK consumers who have been sanguine in the face of the decision to leave the EU.
That said it would be a mistake to assume all the data are positive. Whilst consumers haven’t stopped spending, business investment (a smaller part of GDP than consumption) has been cut back on Brexit uncertainty.
And more obviously, the currency markets are signalling that they do not think the value of the economy is quite what it once was.
As is often pointed out, a falling currency has some beneficial effects: helping exporters, potentially assisting in rebalancing the economy towards manufacturing and away from services, increasing tourism and potentially raising investment from overseas as UK assets become cheaper.
The darker side though is rising inflation. This, however, takes time to feed through. Marmite-gate is one of the opening shots but the pickup in inflation we saw in September to 1% likely doesn’t yet reflect any of the fall in the pound. Moreover, there are other drivers of inflation that are also shifting. Inflation has for the past two years been artificially held down by falling commodity prices (mainly oil), however with commodities having stabilised these have now worked their way through the system. The chart from M&G below, shows this well where the green bars indicate when energy prices have added to or subtracted from inflation historically and how they’re likely to add to inflation going forward.
The above points to higher inflation going forward for the next few years. The Bank of England expects inflation to peak at 2.8% in 2018 and not to fall back to 2% until 2020. Others are less sanguine: The National Institute for Economic and Social Research (NIESR) forecasts a rate of 4% late next year.
Higher inflation, of course, cuts disposable income, so the worry is that whilst consumption is robust now, it will fade over the next few years. This is part of the reason that the Bank of England cut its 2018 growth expectations from 1.8% to 1.5%.
As of yet, the UK economy has remained robust. It would be wrong (and silly) to forecast impending doom, but nevertheless there will certainly be challenges to overcome going forward….
US Elections: Trump Resurgence
The US election is starting to feel a lot like the run-up to the Brexit vote. The announcement of a fresh FBI investigation into Hillary Clinton’s emails during her time as Secretary of State has breathed new life into Donald Trump’s campaign and raised the real prospect of another surprise result. Clinton is still the odds-on favourite, but this jump has spurred a flurry of asset manager commentary about the effects of a Trump victory. In brief, our views are pretty similar to those we had prior to the EU referendum vote, namely:
- It’s impossible to call the results of the election in advance. We need to factor in that it’s still most likely that Clinton will win, but at the same time the significant chance she doesn’t needs to be respected.
- Whilst it seems like a binary outcome (either Clinton or Trump will win), for markets the effects of either are more complicated as it depends on amongst other things;
- on just how much they win by
- which party retains or gains control of the House and Senate as this will affect how much leeway the future president has
- how each candidate behaves once in office (this is probably a bit easier to predict for Clinton given her previous record in office. Trump is much more of an unknown)
Source: Nate Silver, fivethirtyeight.com
Unsurprisingly, in the fact of complex and messy potential outcomes, our investment strategy hasn’t changed from sensible diversification which remains the current status of portfolios. We have not made any hasty changes, and are only planning to do so at the beginning of next year, when we can assess the results of the election more clearly.