Last month was another busy month for global financial markets, particularly from a political perspective. US, Japanese and emerging market equities performed well, which resulted in strong performance for our fully managed portfolios.
Global financial markets had a busy month during October, with political news a key driver of markets, notably in the US and Japan resulting in good performance in those markets. However, less positive news in Spain has kept European political risk on the agenda.
Here in the UK, much of the focus was on the Bank of England. The Bank has been signalling for some time that interest rates are going to go up, and on 2nd November the Monetary Policy Committee voted in favour of an increase. The bank rate has now been raised from 0.25% to 0.5%, the first increase since the financial crisis.
While this increase was expected, at the same time the Bank talked down the strength of the UK economy, discussing weaker business confidence largely due to Brexit. This pushed the value of the pound down and helped UK equity markets to perform well.
Away from the UK, there was a lot of political news to digest during October.
In Japan, Prime Minister Abe was re-elected after calling a snap election in late September, paving the way for four more years in government. The stability this brings to economic policy was welcomed by financial markets, and was good for Japanese stocks.
Meanwhile, the US House of Representatives is pushing for tax reform to take place before the end of the year. Economic data released in October shows the US economy is continuing to perform strongly, while markets eagerly awaited President Trump’s decision on who will become the next chair of the Federal Reserve.
Closer to home, European political risk is very much back on the agenda: in Spain, Catalonia voted for independence in an unofficial referendum. This, as would be expected, had a negative effect on Spanish equity prices.
Given these market movements, how have Nutmeg portfolios performed?
Equity markets had a good month, with Japanese, emerging markets and US equities doing well. As we’ve positioned our fully managed portfolios to have lots of exposure to those regions, October was a really strong month for performance.
Our highest risk portfolios delivered up to 3%, our medium risk portfolios around 1.5%, and our lowest risk portfolios made small gains.
What changes have you made to fully managed portfolios?
We made no changes to portfolios in October. We have higher than normal exposure to Japanese and emerging market stocks, and, while we will continue to manage the risk, we’re happy with our current portfolio holdings.
This month’s customer question came from David O’Reilly via Facebook. David asked:
If Brexit leads to a downturn in the UK economy, how exposed are Nutmeg’s portfolios to losses? Following on from that: how much do you think these fears are priced into the markets, and does this create buying opportunities if the fears are say overdone?
To begin with, it’s important to note that we are global investors. We look for investment opportunities around the world, rather than only focusing on the UK.
At the moment, we have lower exposure than usual to UK equities and UK government bonds, mainly due to the concerns around Brexit. We also take the pound into consideration — it will move depending on the sort of Brexit we get.
In terms of the second part of the question, the Bank of England is already saying the UK economy is a lot weaker because of Brexit concerns. So, to a degree, this is already priced into the markets and the way people are thinking about UK stocks, particularly for international investors considering UK investments.
But we also need to view the UK as a global market: more than 70% of its earnings come from overseas. So, if we move towards a weaker UK economy and harder Brexit, the pound would most likely fall and then actually boost the UK market.
About this update: This update was filmed on 7 November 2017 and covers figures for the full month of October 2017 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
