Central banks ensured that June was a much more positive month than May for financial markets. The US Federal Reserve, among others, is widely expected to cut interest rates soon. Equity and bond prices have gone up as a result.
We’ve seen volatility across financial markets in June. What has been going on?
We did see some volatility, but June was a lot better than May. If you rewind back to early May, the US president’s tweets unravelled the hope that the US and China were getting close to a trade deal. The president also weaponised tariffs against Mexico. That really unsettled markets.
Trade talks haven’t really progressed with China, but they haven’t got worse. In the meantime, central banks have stepped up and started to talk about cutting rates to support the global economy. That’s really lifted financial markets. If you look at the US, which drives most financial markets, and rewind back to November last year, financial markets were expecting US interest rates to go up to 3% by the end of 2019, from 2.25% at the time. Markets are now expecting interest rates to be cut to 1.75%, from 2.5% now. That’s a big change for financial markets.
We’re also seeing the European Central Bank start to talk about helping the economy. In the UK, the Bank of England has lowered its outlook for growth which means there could be a UK interest rate cut later in the year. Australia has cut rates to 1%, which is the lowest on record. These moves by central banks have overwhelmed the negative sentiment of the trade talks.
What does the anticipation of lower interest rates do for financial markets?
If the decisions by central banks have credibility – if the market agrees there’s a need to do it and it’s not motivated by political considerations, for example – that generally lifts almost all financial market prices. That’s been the case in June. In May, global developed stock markets lost 5.8%, but in June they returned 6.6%. That was a really big rebound driven by central bank actions.
If you look across the two months, overall, most markets have edged out small gains. The exceptions were areas that were hit by concerns over trade tariffs, particularly emerging markets and Japan. Those markets have lost 3% over the two months combined. Markets that are less affected by trade tariffs have done reasonably well.
If you look at bond markets, because of the expectation of falling interest rates, there have been really solid returns, particularly in May but also in June, and in particular in US corporate bonds.
Overall, most markets have edged out gains over two months, with particularly strong returns in bond markets.
Against this backdrop, how have Nutmeg’s fully managed portfolios performed?
Not surprisingly, we saw really good gains in June of between 1% and 5%, driven by global equities.
Here in the UK, equity markets returned 3.5%. There were also good gains from bonds, particularly UK corporate bonds but also emerging market bonds, which helped our medium-risk portfolios. If you look at the two months combined, May and June, there were small gains across all portfolios.
Looking back over 2019 so far, we have had the best returns we’ve seen in the first half of the year since Nutmeg was launched in 2012. Of course, it’s been a bumpy ride given what’s been going on with the trade conflict between the US and China.
With this in mind, have you made any changes to the fully managed portfolios?
We haven’t made any changes in June. We’re happy with the level of risk we’ve got in the portfolios at the moment. In the short term, trade tensions will continue between the US and China, which is negative for market sentiment. On the other hand, central banks are stepping up. I think there will be a rate cut in the US in July, which is supportive for markets, so we expect equity markets to grind higher in the second half of the year. Of course, that’s unless there is an escalation in tensions between the US and Iran, which could derail that positive sentiment.
This month’s customer question comes from Laurence on YouTube. “If you are committed to sustainably driven investments, why do you charge more for investing in such portfolios versus your basic balanced approach?”
We use third-party funds from a wide range of providers to deliver returns from different asset classes. If you look at our managed portfolios, the ongoing fund costs are 0.19% a year, which is very low. Generally, socially responsible investments cost more in the marketplace. Our socially responsible investment portfolios’ fund costs are 0.33%. That’s a small increase but certainly not as much as you’d see in the broader marketplace, and we’re always trying to keep those costs as low as possible by pressurising outside fund providers to reduce their costs every year.
When you look at our fees, our management fee is exactly the same for both managed and socially responsible portfolios and that’s despite the fact that the cost of running these socially responsible portfolios is quite a lot higher than our other portfolios. We’ve made a commitment to keeping our management fee the same and we continue to exert pressure on third-party fund providers to lower their costs.
Quite simply, the more money we have in these investments, the greater buying power we have to push these fund costs lower.
About this update: This update was filmed on 2nd July 2019 and covers figures for the full month of June 2019 unless otherwise stated.
Data sources: Bloomberg and Macrobond.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.
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Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.Other posts by Shaun Port
