Nutmeg investor update: October 2019

James McManus


5 min read

Cuts to US interest rates provided a boost to the US, as recession fears start to subside. As the Brexit deadline approaches, we continue to keep a close eye on developments amid the possibility of an upcoming general election.

After a rocky month in August, it seemed that markets were more stable in September. Is that right?  

That’s right. August was a choppy month for equity returns, and that was largely driven by an inversion in the US yield curve and the US bond market, which is when long-term bond yields fall below that of short-term yields. That’s important because investors have often used this as an indicator of recession. But as we moved into September recession fears fell away somewhat, and the Federal Reserve was very supportive of markets by cutting interest rates in the US by 0.25%the decision was widely expected so we didn’t see any dramatic gains in markets, it was more business as usual. But a cut to interest rates lowers the borrowing cost to consumers and businesses, and that’s very supportive of markets and the economy.  

One person who felt the Federal Reserve didn’t do enough was Donald Trump. He’s been advocating further cuts and would like to see the Federal Reserve stimulate the economy further. As it’s coming up to election year, the economic trajectory of the US is very important to him. He was also in the news because of impeachment proceedings that were lodged against him by the Democratic Party in the US. We don’t really expect that to have a significant impact on market events in the near term, but it does introduce an element of uncertainty into the political process of the US, and also an element of uncertainty into the timing of a US-China trade agreement that may come to light in the fourth quarter. 

On the topic of trade disputes, Donald Trump again gave a speech to the UN this week where he criticised China’s approach to trade, potentially ramping up the trade rhetoric a little bit further.  

Also in September, we saw an attack on Saudi oil installations that took out about 5% of world production. This led to some volatility in oil prices. What we found at the end of September was that oil prices reduced back down to that $59-60 a barrel level it was at, at the start of September.   

So how did markets perform in September?

Developed markets had a positive month, with developed equity markets finishing the month up around 2% in US dollar terms, which was led by some standout performances in European equities, which were up 3.5%. Japanese equities also had a stellar month – up over 5%. So developed markets really recovered a lot of their losses from August, with the exception being the UK. 

UK equity markets finished the month in positive territory, but didn’t quite get over that watermark for August. Emerging markets continued to underperform against developed market counterparts, experiencing a positive return but not enough to get them ahead of developed markets. This is a continued trend we’ve seen over the last couple of months.  

On the fixed income side, it was much more of a mixed bag. US government bonds had a phenomenal August. Unfortunately, they gave back some of those returns in September – they finished the month down around 1%, whereas UK government bonds actually rallied and finished on positive territory, really moving with the ebb and flow of Brexit news. Corporate bonds meanwhile broadly finished flat, but there were some interregional differences.   

What are the latest developments with Brexit and how are they affecting your investment strategy?

British politics is certainly not boring at the moment. We had the latest twist in the Brexit saga when Prime Minister Boris Johnson’s prorogation of parliament was found to be unlawful, which resulted in the resumption of parliament and the recall of MPs. The pound has started to rally against the euro on the initial optimism that there will be more room for parliament to avoid a hard Brexit. What we’ve seen since then – and this is quite typical – is that optimism has faded away as rival factions within different government groups have found increasingly inventive ways to skirt parliamentary convention. 

We still think all options are on the table for Brexit. We’re taking a very cautious stance. We believe that a general election is the most likely outcome and we think we’ll likely get an extension, but it could come by a vote of no confidence. The result of that election is very difficult to call, because it will depend on the party policies put forward, but also whether any parties work together in their effort.  

Against this backdrop, how did Nutmeg’s fully managed portfolios perform?

The good news is that after a difficult August, all portfolios performed positively in September, with returns ranging between 0.45% at the lower end of the risk spectrum up to around 2% at the highest risk level portfolios.  

With this in mind, have you made any changes to the fully managed portfolios?

We haven’t significantly changed our positioning in recent weeks, though we continue to maintain an underweight position in small and medium-sized companies in the UK because we expect them to be most affected by the Brexit developments. We have also increased our allocation to US dollar assets because we believe the US economy is in robust shape.  

This month’s customer question looks again at British politics: “With another Brexit deadline on the horizon, should I think about reducing my risk level?”

Good question, and the simple answer is no. There’s a  number of reasons for this. First, when investing, it’s really important to stay disciplined, focus on your long-term goal, and avoid any market noise and short-term volatility. That’s just good investment discipline and it helps you avoid the pitfalls of market timing, so really there shouldn’t be too much of a need to change risk level outside of your time frame.  

Second, portfolios are very global in nature, so while the UK is a core investment asset for our portfolios, our portfolios are very diversified, and globally focused. The typical medium-risk Nutmeg portfolio has exposure to around 7,900 underlying securities. That helps minimise the impact that any one asset, exposure, sector, or country can have on the overall portfolio’s performance.  

Third, for our fully managed portfolios, our investment team is constantly reviewing our portfolios to ensure that we’re appropriately positioned to manage the balance of risk and opportunity. So that means not just positioning for one particular outcome, but looking at the balance of probabilities for different outcomes, taking advantage of opportunities when they present themselves, and managing the risk versus the probability of those events taking place. 

The simple answer is that our investment team look after and worry about this for you, so there shouldn’t be a need to change your risk level.  

About this update: This update was filmed on 2nd October 2019 and covers figures for the full month of September 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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James McManus

A self-confessed ETF geek, James is head of ETF research at Nutmeg. He joined in 2015 from Coutts & Co, where he was an associate director in the investment office. James holds a Bsc (Hons) in International Business from Nottingham Business School.


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