Month ending 31 October
A poor month for equities across the globe, as markets experienced a broad sell-off. In GBP terms, Japan was the worst performing market, reversing the previous months gains and declining -6.8%. Emerging markets followed close behind (-6.6%), followed by Europe (-6.3%). The UK and the US declined -5.1% and -4.8% respectively.
UK bonds gained on the month in local terms. UK gilts rose +1%, and UK corporates +0.5%. European government bonds were flat in local terms, while US government bonds declined -0.4%.
GBP weakened versus USD (-2%) and JPY (-2.7%), but strengthened versus EUR (+0.5%).
In USD terms oil declined sharply, falling -10.8%, while gold strengthened +2.3%.
October saw the second significant equity rout of the year, with share markets broadly declining. We believe two factors were at play. Interest rates have risen sharply in recent months, putting valuations under pressure. Secondly, outside the US, there has been some slowing in growth momentum, with concerns that trade tensions will cause activity to slow further.
Investors have also been concerned about the outlook for corporate earnings due to trade friction. However, on the whole earnings have meet or beat expectations.
We recognise that a tighter liquidity environment and more moderate outlook for growth, coupled with ongoing political risk in the forms of trade friction especially, could cause continued market volatility.
However, in the current economic climate, we still believe that shares can continue to outperform bonds, although we expect more modest returns and higher volatility than 2017. Security selection – being in the right companies delivering strong earnings – will continue to be a key driver of performance.
At a regional equity level, we favour the US, Europe, Japan, and select emerging markets. We remain underweight the UK, where uncertainty remains high. In fixed income, high quality, short duration assets are at the core of our strategy.
As ever, we remain well-diversified across asset classes, regions and sectors, and we continue to maintain a small allocation to alternatives for diversification.