It’s been a really busy September in the markets. Trade tension remains between the US and China, causing emerging Asian markets to suffer, while the US has made much better progress with other key trade partners. Brexit negotiations made the pound volatile, and the impact of the Italian government’s proposed budget dragged on European markets.
What’s been going on in the markets?
Trade talks and tariff negotiations have continued to have an impact, although the US has made some progress which has settled markets somewhat.
The US has now reached a deal with Korea, with Mexico, and with Canada. These are some big strides as far as the US is concerned, but negotiations with China have come to a bit of an impasse. Unsurprisingly, that’s hit Asian stock markets. Emerging Asian stock markets fell by 2% last month. In contrast, both Japanese markets and Latin American markets were up by around 5%.
Emerging Asian stock markets certainly bore the brunt of trade tensions, while on the whole, global equity markets only made weak progress, rising by 0.4%.
European performance was weak last month. That’s because the budget proposed by the new Italian government for next year is likely to breach European Union (EU) rules. This really sets up a fight with the EU, which meant Italian equities and bonds suffered in September.
Perhaps more significantly, global bond prices took a significant hit during the month. The US economy is growing very strongly at the moment, and oil prices have also increased quite sharply in anticipation of Iranian supplies coming off the market due to US sanctions. The result was that the US Treasury market lost 1% last month, and that’s rippled through other global bond markets.
So that’s the global picture, but of course, we can’t avoid talking about Brexit. What impact has it had in the last month?
When the negotiations hit a brick wall in Salzburg earlier in September, it was the pound that felt the impact rather than the UK equity or bond markets. As investors continue to price in what’s going to happen over the next six months – when we’ll get a deal, and what that deal will look like – those gyrations are reflected by the currency.
If you look at what speculators are doing, they’re generally betting that there could be a ‘hard’ Brexit. Short positions on sterling are at their highest level since October 2016, and those speculators would do very well if we have a ‘hard’ Brexit.
On the other hand, if we move towards a ‘softer’ Brexit and an earlier deal (before the current proposed 29th March 2019 deadline), we would expect sterling to perform very strongly.
It really is all about the currency at the moment when it comes to Brexit. UK equities and bonds performed very similarly to global markets last month. UK equities returned 0.7% and UK government bonds lost 1.6%*.
* update from 1% loss stated in the video
Against this backdrop, how did Nutmeg portfolios perform in September?
As expected following the difficult month for bond markets, our lowest risk portfolio, which is made up entirely of bonds, made a small loss.
In all other portfolios, we saw small gains reflecting what we’ve seen in global markets, but they haven’t felt the brunt of the fall in bonds due to our conservative approach to our holdings in fixed income and bond exposures.
With this in mind, have you made any changes to the fully managed portfolios?
We haven’t made any changes this month. We’re very much focused on what happens in 2019 and beyond, and we see the global economy doing quite well. This means we’re happy with how we’re positioned.
It has been a bad year for emerging market stocks but we’re sticking with our position because we think they remain attractively valued. When reviewing the 47 global stock markets we look at, only four have become more expensive this year – all the other stock markets have become cheaper over the past nine months.
Valuations in most asset classes remain attractive, so we’re quite optimistic about returns.
Customer question
This month our customer question is from Francisco, who got in touch with our customer support team. He’s asked:
“With so much talk about the health of the global financial markets and the next possible financial crisis, what is Nutmeg doing to mitigate risks across the board? (regardless of risk level, whether 1 or 10)”
Good question, Francisco. It’s ten years since the financial crisis, so plenty of media outlets are actively anticipating the next one. We think this has more to do with the fact it’s the anniversary of the last one than anything in particular that’s changed in the markets in the past year or so.
As an investment team, we do focus on what could go wrong, what the risks are, where the imbalances lie in the global economy, and what might make markets fall sharply.
Despite this, we remain fairly optimistic at the moment. The US economy is growing very strongly, but inflation isn’t actually accelerating that fast, even with a low unemployment rate. The Chinese economy has built up a lot of debt over the past ten years, but the Chinese government is managing that very well, restructuring the economy quite successfully over the past 12 months. In emerging markets, foreign exchange reserves have been built up considerably, and they don’t hold much foreign debt.
For us, the outlook is quite good through 2019 into 2020, but we’ll continue to analyse economic data to spot any imbalances and work out whether we think the picture could change.
About this update
This update was filmed on 2nd October 2018 and covers figures for the full month of September 2018 unless otherwise stated. Data source: Bloomberg, 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.
Other blogs you might like:
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
