Market Update - September
Crisis, what crisis?
Despite the dramatic initial slowdown indicated by UK economic survey data in the immediate aftermath of the EU referendum result, more recent data paints a less bleak picture. So far, the vote appears to have shaken the confidence of both firms and households, but only corporate behaviour has actually been impacted. Despite consumer confidence dropping to its lowest level since June 2013, the volume of retail sales in July was much better than expected. We continue to watch business investment carefully, as we expect that to be impacted by post referendum uncertainty, and have concerns that any fall in investment could eventually translate into lower employment and wages.
Policy divergence ahead
The Bank of England, European Central Bank, People’s Bank of China and Bank of Japan continue to favour easing monetary policy, and we expect to see further cuts in interest rates and continued quantitative easing this year. Conversely, we expect the US to raise interest rates, although this is likely to be delayed until after the November presidential election. This divergence can explain the strength of the dollar, although in valuation terms sterling now looks cheap compared to its historical range. This fall in the pound is likely to cause a spike in UK inflation as imported goods become more expensive, but we expect this to be a temporary effect which is unlikely to provoke a policy response.
Equity and bond markets have become more correlated. Since the referendum result both asset classes have benefitted from the expectation that rates will be kept lower for longer, and that injections of liquidity will continue to support prices. Volatility has been low despite uncertainties around EU membership and the upcoming US presidential election. However, we have seen more challenging markets recently, with bond yields rising, the FTSE100 falling 3% over three trading days, and signs of market rotation away from the more expensive quality, income generating assets to cheaper more cyclical areas favoured by ‘value’ approaches. We retain our neutral positions towards equities, although have been taking profits on the margins, where clients need cash to fund charitable expenditure. We continue to have limited bond exposure and prefer to hold absolute return funds for diversification. Property is held for the attractive income characteristics and we expect the liquidity pressures in this asset class to ease in the coming months. We expect a pick-up in volatility, and believe that our diversified investment approach will help smooth the returns on the charity assets under our stewardship.
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