Global markets were extremely volatile this quarter as concerns over China’s slowing economy became more pronounced. The impact was particularly strong on emerging and Asian economies. The MSCI World Index reflected this decline in sentiment across global equities, falling by 8.53%; their worst quarter for 4 years.
UK and US Growth Continues
Despite the US and UK equity markets falling by over 7%, both economies continue to grow. They are both close to full employment and real wage growth has meant consumer confidence is now exceeding the levels seen before the 2008 crisis. The Fed once again, however, decided to leave interest rates unchanged due to recent market volatility. They turned out to be surprisingly dovish which threw market expectations off course. This was arguably a regressive move by the Fed, given it takes at least a year for any interest rate rise to take effect, so they might find themselves behind the curve when they do eventually raise them. The expectation is that rates in the UK will rise in Q1 of next year.
Concerns of a Strong Dollar
An ongoing theme is the strong US dollar, which is acting as a headwind against US corporate earnings as exported goods are less competitive, although many companies have in fact been posting earnings figures above expectations. The most significant impact of the strong dollar is on emerging economies which have dollar-denominated debt as this has effectively become inflated, increasing their debt-GDP ratios. It is also unclear how active companies in emerging markets have been in hedging their exposure to exchange rate movements.
In addition to China’s problems and a strong dollar, many emerging markets which rely on commodity prices for government revenues have seen a deterioration in budget deficits. Emerging equities have had their fifth worst quarter this millennium tumbling over 15% in sterling terms, magnified by weak emerging currencies.
Europe and Japan
Concerns over Greece’s membership and contagion in the Eurozone have been brushed aside for now, despite the fragile political system and underlying problems of the monetary union which remain. Also, despite unprecedented stimulus and currency depreciation, perhaps surprisingly, Eurozone manufacturing is failing to gather momentum. There have, however, been some encouraging signs of growth in continental Europe, particularly for countries such as Spain and Italy.
A weak yen has aided the Japanese economy, however output data has been disappointing and the debt-GDP ratio remains a concern. As a result, we might expect further stimulus to boost GDP and inflation, which has so far failed to have the desired effect. The commodity slump and global economic concerns pushed stocks nearly 15% lower this quarter, although a stronger Yen against sterling reduced this loss by 5% for UK investors.
Low Commodity Prices
Low commodity prices are providing a significant tailwind to consumers, particularly in developed economies where energy bills and fuel make up a considerable proportion of consumer spending. As a result, we continue to favour stocks which will benefit from this
|Market||Index||Performance 2015 Q3 (% change) GBP||Performance
2014 Q3 – 2015 Q3 (% change) GBP
|Performance 2015 Q3 (% change) Local currency||Performance 2014 Q3 – 2015 Q3 (% change) Local currency|
|Eurozone||FTSE Europe Ex-UK||-6.47||-1.79||-8.85||2.13|
|UK Gilts||FTSE All-Stocks||3.82||8.21||3.82||8.21|
|Emerging Markets||MSCI Emerging Markets||-15.25||-13.61||-12.21||-7.13|
Strategic Asset Allocation
|Portfolio||Cash/Bonds %||Equities %||Alternatives (e.g. Property/Infrastructure) %|
Cautious: Bonds/Cash 50, Equities 39, Alternatives 11
Income: Bonds/Cash 25, Equities 65, Alternatives 10
Ethical: Bonds/Cash 30, Equities 56, Alternatives 14
Balanced: Bonds/Cash 25, Equities 65, Alternatives 10
Growth: Bonds/Cash 5, Equities 87, Alternatives 8
Adventurous: Bonds/Cash 0, Equities 92.5, Alternatives 7.5
We remain underweight in bonds due to credit risk posed by rising interest rates. We are overweight in developed market equities, especially mid and small-cap stocks which are benefiting from domestic economic growth and not disturbed by exchange rate movements. Underweight Asian/emerging market equities have benefited our portfolios this quarter, although we do have some exposure in the more growth focused portfolios due to their long term potential. We also remain neutral on alternatives, such as property and infrastructure.
At Seabrook Clark, we do not think recent market movements are the start of a global economic collapse. There are clearly headwinds facing the global economy which has been highlighted recently as China’s slowdown has become a reality. Emerging markets are perhaps most likely to struggle in the short term, especially as we await interest rate rises in the US. However, low commodity prices will provide a significant tailwind to consumers, particularly in developed economies.
Our approach is to help our clients benefit from attractive equity returns and target sustainable dividends from a diversified portfolio, on the basis of our diligent research and analysis to highlight interesting investment opportunities and mitigate risk as far as possible.
[Jonny Rusbridge, Seabrook Clark Ltd, 2 October 2015]
Please note, our Investment Commentary is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.