September was quite a busy month for financial markets, both in the UK and globally. We saw some big swings, as markets digested a lot of new information.
US dollar movements at play globally
During September, several important developments took place in the US. Inflation started to pick up, while the Federal Reserve renewed its discussions around raising the interest rate and starting the process of withdrawing emergency stimulus measures. Furthermore, US republicans renewed their discussions on tax cuts.
This mix of news was generally bad for US bonds, good for the US dollar and, on balance, positive for US equities.
Of course, US dollar movements are quite important for other countries’ equity markets. Europe and Japan both performed well in September, helped by the stronger US dollar (and therefore weaker local currencies). In contrast, emerging market equities, which don’t perform well when the US dollar strengthens, were largely unchanged during the month.
UK interest rate signal surprises markets
Here in the UK, the Bank of England officials signalled that they’re likely to increase interest rates in November. This came as a complete shock to the markets; most analysts were not expecting to see a hike in the base rate until 2019.
Not surprisingly, against the backdrop of both these domestic and international announcements, UK government bonds had a bad month, losing almost 3%.
The news about the interest rate rise resulted in the pound rallying – it gained almost 5% against the euro. However, as we know, a strengthening pound results in UK equities underperforming: the top 100 UK shares fell by 0.8%.
How have Nutmeg portfolios performed?
Although UK government bonds lost almost 3% during September, we’ve been quite conservative with our bond exposure for some time now. This means Nutmeg’s fully managed portfolios didn’t feel the full impact of the big movements in bonds: most our bond holdings lost less than 1% in the month.
However, this negative bond performance resulted in our lower and medium risk fully managed portfolios experiencing losses of up to about 0.5% during the month.
Our higher risk portfolios, which hold more equities than bonds, were largely unchanged despite the poor performance of UK stocks.
Bonds: down, but not out
Bonds, both corporate and government, play an important role in diversifying portfolios. At Nutmeg, we hold both domestic and global bonds, such as UK corporate bonds and US inflation-linked bonds.
Bonds will always form part of our medium and low-risk portfolios, but we’ll continue to manage the risk associated with them quite closely – particularly when interest rates are likely to rise.
What changes have you made to fully managed portfolios?
As we’re quite happy with the way portfolios are currently positioned, we haven’t made changes to our customers’ portfolios over the past month.
This month’s customer question came via Facebook. Chin Yit, who has a fully managed portfolio, said:
“I adjusted my risk appetite from 8 to 3 today as there have recently been strong feelings that the markets are too overvalued and due a correction soon. Does Nutmeg have any opinions on this? I even thought of transferring investments out to a cash ISA and wait for the next market crash before entering again.”
There are two parts to the answer to this.
Firstly, there are often comments that markets are overvalued and that a correction is imminent. Of course, there is always a correction coming; it’s just whether it’s in six months, a year, or five years. There will always be these bumps along the road when it comes to investing as volatility is a natural part of the process. And, in terms of valuations, while the US market does look expensive relative to history, other markets such as Japan and Europe appear quite reasonably priced at present.
Secondly, it’s important to not try time the market when you’re investing. We’ve run lots of calculations on this and we’ve found that if you do try and predict the market, you often end up exaggerating your losses and ending with a much lower return over the long term. It’s notoriously difficult to time the market to sell, and even harder to work out when to buy back again. Instead, we advocate thinking about your goals and how long you want to invest for, which should be the key determinant in how much risk you take, rather than focusing on trying to time market movements.
About this update: This update was filmed on 2 October 2017 and covers figures for the full month of September 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
