Global stocks enjoyed a strong third quarter and bond yields lagged, as markets were increasingly subject to political events, reports CIO Chris Ralph.
Most investors concur that the current market environment is unprecedented; trillions of dollars have been pumped into markets by central banks, growth has remained sluggish, around a third of government bonds globally offer negative yields, corporate earnings have stalled – and yet equity markets continue to rise.
In the third quarter, one further development became increasingly clear: politics in the developed world matters more to markets today than it has in decades. Investors in developing markets are used to assessing political risk when making decisions, but in developed markets they have generally been able to treat politics as, at most, a secondary issue – no longer.
“We feel that political risk will actually be lower in the developing world over the next two years than in the developed world,” said Polina Kurdyavko of BlueBay Asset Management.
In the UK, the third quarter fell between two political turning points – the EU referendum result announced on 24 June and Theresa May’s first Brexit planning speech on 3 October. Sterling fell dramatically on both occasions, yet very little in-between, especially once Theresa May had replaced David Cameron in July. Stability was also buttressed by the Bank of England’s decision in August to move interest rates to a 322-year low and to increase its bond-buying programme, adding corporate bonds to its shopping list. Moreover, Purchasing Managers’ Indices indicated that the post-referendum economic freefall forecast by the former chancellor has not come to pass.
If sterling has lost almost 15% of its value against the dollar since the referendum, UK stocks have risen quite dramatically – the FTSE 100 surged 7.1% during the third quarter. The two trends were closely related. Most FTSE 100 companies are international, with only limited exposure to the UK, and the fall in sterling made them more appealing to foreign investors. Likewise, UK exporters enjoyed seeing the value of their foreign earnings rise in sterling terms.
It was, likewise, a good time to be invested in the S&P 500, which rose 3.7% over the quarter. The US suffered an ‘earnings recession’ through the first and second quarters of the year, but there were early signs that third-quarter results might see earnings shift into positive territory.
US payrolls reports swung from upbeat to disappointing over the course of the summer, but unemployment remains at very healthy levels, and many US companies are taking advantage of low bond yields to embark on borrowing – US corporate issuance has already passed $1.1 trillion this year. Inevitably, there are attendant fears – a report published by Bank of America Merrill Lynch in September showed that 54% of fund managers believe stocks and bonds are overvalued. The ability to differentiate yourself from the market through expert stock-picking is more valuable than ever.
“We do feel that the UK, and the US especially, are late-cycle in terms of economic expansion,” said James de Uphaugh, fund manager at Majedie Asset Management. “For the US, at 87 months and counting, this is the fourth-longest period of expansion since the Second World War.”
Yet the headline fear in the US concerned politics. Global trade is already struggling, and in the third quarter the European Commission sent a €13 billion late tax bill to Apple, and the United States Department of Justice sent a $14 billion fine (for pre-crisis mortgage mis-selling) to Deutsche Bank. Both hint at creeping protectionism, but they are negligible next to the protectionist policies promised by Donald Trump, confirmed in July as Republican nominee for this autumn’s US presidential election; Hillary Clinton’s attacks on drug prices hit the stock prices of pharmaceutical companies. Technology companies, meanwhile, continued their run; the NASDAQ gained almost 10% over the quarter.
A rising oil price was one of the factors that helped push the FTSEurofirst 300 up 4.1% and the Nikkei 225 up 5.6% over the period. A barrel of Brent crude ended September just above $50; a significant recovery from a tough year for oil majors, helped in part by OPEC agreeing to set production limits.
The role of central banks came under increasing scrutiny, not least from a critical Donald Trump; and, in early September, ECB purchases of government bonds passed the €1 trillion mark. As the IMF downgraded its global growth forecasts for 2016, there were increased calls for politicians not to leave all the work of boosting economic growth to central bankers but, instead, to consider fiscal stimulus programmes. Hillary Clinton’s election manifesto promised just that.
Some see greater need for it in the UK, however, due both to mixed business sentiment indicators and increasing signs that the government would prioritise border controls over free single-market access in its Brexit negotiations. Amid growing calls for fiscal stimulus programmes, it was notable that the first major, long-established European political party to commit itself to such a policy was in fact the much-derided UK Labour Party, whose conference fell at quarter-end.
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The opinions expressed are those of Polina Kurdyavko of BlueBay Asset Management and James de Uphaugh of Majedie Asset Management and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or
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