Month ending 30 September
A weak month for equites with GBP strength weighing on overseas returns. The UK was the only positive region for a GBP investor, up +0.77, while emerging markets were -3.30%. Europe, the US and Japan delivered -0.14%, -0.62%, and -1.72%.
Bonds also suffered in September, with UK government bonds down -3.06%. European government bonds were off -0.46% and US government bonds lost ground marginally at 0.85% after the Fed meeting in September.
GBP appreciated strongly against all main currencies, gaining against +6.38% versus JPY, +5.11% versus EUR, and +3.72% versus USD.
Oil bounced back from last month’s fall, gaining +11.26%, however gold fell -2.70%.
The fall in GBP since the referendum continued to be a major impetus for rising inflation, combined with a rebound in the price of oil has led to UK inflation rising to 2.9% in August, the Bank of England expects inflation to rise above 3% by October. Hawkish rhetoric from the Bank of England persists and, while activity measures remained in expansionary territory, there has been weakness in some areas.
In the US, economic output was revised up to 3.1% in Q2, above expectations for QoQ annualised GDP growth. Buoyant consumer confidence and renewed strength in business surveys offer support to the growth outlook.
Eurozone GDP was revised higher still in Q2 and PMI data continues to show resilience, with currency strength not yet weighing on exports. Inflation remained at 1.5%, while Consumer confidence has strengthened further.
Chinese activity indicators strengthened overall to 52.4, with services doing the heavy lifting and Inflation increasing further to 1.8%. Our GDP proxy indicator still points to stronger activity ahead, though growth may be fitful.
Japanese Q2 GDP accelerated sharply to 2.5% QoQ annualised, with July’s inflation showing some increase at 0.7%. However business surveys weakened, especially in services, displayed in the composite PMI figure down to 51.7 in September. The continued economic recovery is also reflected in September’s consumer confidence.
Year to date, asset prices have responded positively to better economic data and better growth has been reflected in the earnings of companies we hold. With economic data continuing to improve, we turn our focus from the outlook for growth to the likely path of inflation and interest rates. This remains supportive of risk assets
(i.e. equities) for now. Political stress remains, but so far has not materially dampened the improving pace of growth and our view remains constructive. We continue to think that shares will outperform bonds this year and that stock selection and active management will continue to add substantially to returns. Rich valuations mean we think a correction is possible, but the necessary conditions for a bear market are not in place. Having trimmed risk ahead of the seasonally weaker summer months, we are adding to equities, decreasing our fixed income allocation.