The Only Game in Town

Wall Street

The US stockmarkets were the only game in town in August.

US stockmarkets provided the only positives in August posting another month of strong gains due to robust economic news-flow.  However, all other major global regions showed negative returns, with geopolitical issues and trade war concerns weighing on investor sentiment. The overall result was a rise in the US heavy MSCI World Index of 1.3%.

Mixed sentiment across the globe

Investors in the US were in a relaxed mood and stockmarket volatility in August (as measured by the VIX index) was very subdued. However, markets in Europe and Asia were not as calm and there was significant volatility in Emerging Markets, with Latin America and Turkey seeing heavy sell-offs.

Summer doldrums for UK investors

The UK stockmarket fell back during the month, but it was a reversal of recent months as medium and smaller companies held up better than Blue chip larger companies. Although Brexit noise remained a feature, it was weak performance from oil and mining sectors which were key detractors to the UK markets.

The longest US bull market since World War II

The rally in August resulted in a record breaking month for US stockmarkets, with the major benchmarks hitting new peaks. During the month, the US bull market became the longest on record since World War II having avoided a 20% or more decline since March 2009. During which time the S&P 500 has risen more than 300%. This was the cue for lots of commentators to trot out the adage that bull markets do not die of old age.

Currency diversification remains a positive

Although currency movements have proved more muted recently, strong US economic data saw an extension of the rally in the dollar and Brexit fears pushed the pound lower versus the yen and the euro. The overall currency effect saw the 1.3% return from the MSCI World Index over the month translate into a gain of 2.2% for UK investors. We continue to extol the virtues of holding well-diversified international exposure given the political uncertainty that threatens the domestic economy.

A better month for bond investors

Away from stockmarkets, increased nervousness amongst investors (outside of the United States) saw a better month for most areas of bond markets. US and German Government bonds rallied as investors sought safe havens. However, the buoyant US economy meant that High Yield bonds were favoured in America. As a result the IA £ High Yield sector was the best performing area of bond markets and returned +0.3%. The IA Gilts sector was broadly flat over the month, whilst Emerging Market debt was hit hard by falling currencies.

Best of the Rest

Commercial property had a steady month and is proving a good bedrock within our cautious and balanced portfolios. We have stuck with our favoured three funds from F&C, Henderson and Kames. The asset class is again displaying the two attributes we seek – attractive yields compared to government bonds; and a lack of correlation with equity and bond markets.

Looking Ahead

This month highlighted the disparity we have seen between US stockmarkets and the rest of the world this year.  Whereas the S&P 500 has provided double digit returns in sterling year to date, other major stockmarkets (UK, Europe, Japan, Asia and Emerging Markets) have seen no gains in 2018.

Strong US economic data and global political turbulence are polarising investor sentiment. Whether the US stockmarket can continue to outperform so strongly is questionable, but the lack of progress of other global stockmarkets is seeing more value emerge. As a result, our strategic view remains focused on the belief that there is value to be had in several areas of global stockmarkets.

Political uncertainty at home and abroad will remain a feature but it is largely background noise in our view.

 


A full version of  Whitechurch Securities’  September 2018 Asset Views report can be downloaded here.