Adding to volatile market conditions across the globe, news flow surrounding central banks and future policy contributed to a global bond downturn at the start of this week, with investors reacting to the prospect of tighter monetary policy forecasts. With investors becoming increasingly conscious of central bank tapering over the next 6 to 12 months, coupled with the implications of higher interest rates and stickier-than-expected inflation pressures, bond yields soared over the week, with US 10-year treasury yields jumping above 1.50% for the first time since the end of June. Given the interlinked nature of bond and equity markets, risk assets experienced a broad-based selloff earlier this week, with growth-oriented stocks the most impacted. Despite recent volatility, investor sentiment has improved from last week, with the CNN Fear & Greed Index easing from ‘extreme fear’ to ‘fear’, likely because of easing Evergrande news flows. While equity indices across the globe experienced the sharpest fall on Tuesday due to negative movements in bond markets, equity prices have since steadied and recovered some of their intraweek losses, providing us with a good opportunity to take profit and make changes to portfolio allocation.
Continuing last week’s trend, US, Asian, and European equity markets fell over the past five trading sessions due to the macroeconomic headwinds detailed above. In the US, equities were influenced by the debt ceiling stalemate and the prospect of a government shutdown before reaching a solution. While this has contributed to the downward pressure on risk assets over the week, we do not expect this issue to influence markets for long, as we anticipate that the debt ceiling will be risen over the coming weeks.
Within China, although financial markets are yet to see the outcome of the Evergrande saga, a flagging Chinese recovery and China’s energy supply issues as we approach the winter months have been a concern for investors. While other Asian indices fell on the back of the increase in government bond yields, Hong Kong equities finished the week slightly higher, buoyed by an improvement in the outlook for a handful of Chinese shares listed on Hong Kong exchanges.
Continental Europe finished the week lower given the macroeconomic headwinds detailed, combined with political uncertainty in Germany, as rising bond yields and the prospect for higher energy prices encourage investors to take some risk off the table. Despite these recent movements, it is useful to highlight that equity markets have steadied over the past 48 hours, and any subsequent movements in equity prices could be caused by subsequent news flows or further movements in government bond yields.
Similar to the update last week, UK equities are one of the few regions to improve over the past 5 trading sessions. Despite many of the headwinds outlined above still holding key implications for UK firms, analysts have continued to highlight the undervalued nature of UK equities, with global investors increasing their asset allocation to the region. In addition, stable economic news flows continue to aid the outlook for the UK, while the jump in government bond yields should support value-oriented equities which make up a large proportion of UK equity indices.
Considering the prospect for inflationary pressures to remain sticky, and the potential for monetary policy tightening over the next 6 to 18 months, non-equity sectors fell over the week, with investors preferring risk-free cash given the movement in bond yields.
After another volatile week, the OBI portfolios fell alongside equity and non-equity markets, albeit the uncorrelated, low risk assets within the OBI portfolios helped to mitigate the fall in asset prices. OBI 3 to 5 fell sharply over the period due to exposure to falling equity and non-equity assets, while the equity exposure continued to drag on the performance of OBI 6 to 8.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
Portfolio Allocation Update
Over the week, we have observed a material increase in downside risks in the short term, with recent movements in bond markets suggesting that we could see further volatility and a 5-10% sell off in risk assets in the short term. We see this as a key risk in the months ahead as markets adjust to a slowing pace of economic recovery, rising health and inflationary pressures moving into the winter and consider the outlook for monetary policy moving into 2022. While this has not impacted our positive long-term outlook, given the strong portfolio performance experienced over the year so far, it is our view that it would be prudent at this stage to take some risk off the table and prepare to take advantage of opportunities as they arise in what we expect to be a volatile few weeks. In doing so, we are not trying to time the markets, but in reference to our classic motorway analogy, we are looking to slow down the car given risks ahead.
Reflecting our more cautious short-term stance, this week we have taken profit on some positions which we viewed as either having a negative 3-month outlook or delivering very little value over the quarter, holding the proceeds in cash which allows us to remain flexible as opportunities arise, while also protecting the returns we have built up over the year so far. Cash levels vary per model, with an average level of 20%, and it is our view that this provides us with sufficient protection and flexibility to navigate changes in the economic backdrop in the weeks ahead. Overall, rest assured that while we could see some volatile movements in markets, we are watching the data and market sentiment closely, and will keep you updated within our weekly updates on our ongoing positioning and new opportunities as they arise.
Key Events We Are Watching This Week:
- Thursday 7th: UK Halifax House Price Index, September.
- Friday 8th: US Non-Farm Payrolls, September.
This Day in History
On this day, in 1938, the Treaty of Munich was signed by Adolf Hitler, Benito Mussolini, Édouard Daladier and Neville Chamberlain, forcing Czechoslovakia to give territory to Germany. Chamberlain infamously declared “peace for our time” on his return to London.
If you have any questions about any of the above, don’t hesitate to get in touch.
Thank you for reading, have a great week!
Jason, Gina & Ben
