Market Update – September 2019
Bond yields fall to record lows and central banks look set to cut rates. In the UK, Brexit-related uncertainty intensifies
Equities tread water as bond market surges
Equities have pulled back from recent highs, as investors worry about signs of an escalation in the US-China trade war. However, moves in the bond market have been more dramatic. Yields around the world have fallen to record lows amid rising economic concerns and the prospect of further monetary policy easing. In Europe and Japan, which have negative central bank policy rates, government bonds with a maturity of well over a decade now have negative yields. In the US, the 30-year Treasury yield has fallen below 2% for the first time ever and in the UK the 10 year gilt yield has fallen to around 0.4%
Global central banks expected to cut interest rates in September
Both the ECB and the Fed meet this month. In what will be Mario Draghi’s penultimate meeting as President, the ECB is expected to further lower rates and potentially launch a new round of bond purchases. Meanwhile, the US central bank is expected to cut rates by 0.25%. While current US consumption and employment data remains strong, recent Fed communications suggest they are concerned about the potential impact of weaker international conditions.
Boris Johnson raises the stakes on Brexit
The Prime Minister’s prorogation of Parliament ahead of a Queen’s speech in mid-October has opened up a range of outcomes including action from MPs opposed to a “no-deal” Brexit and a general election. Sterling has fallen to new lows for the year and domestically-exposed equities continue to struggle. On a brighter note, it was a busy summer for foreign takeovers of UK companies, suggesting that some international buyers see attractive value in the UK market.
Overall, our equity exposure remains broadly in-line with our long-term targets. While valuations are above long-term averages, they are not at extreme levels – especially in comparison to the bond market. Even so, our concern about slowing global growth and the risks of an escalation in the US-China trade war prevent us from taking an overweight position. With the bond market now trading at record-high valuations, we maintain an underweight position. In recent months we have become more positive on gold and have added to portfolios where appropriate. It is a volatile asset but it tends to be uncorrelated to be equity markets and has the potential to provide positive returns in periods of financial turbulence.
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