Continuing the risk-off shift observed over September, equity markets entered the new month on the back foot, with an increasingly uncertain near-term outlook leading markets lower over the week. Rising energy prices, supply chain risks, US debt concerns and speculation on central bank movements all continued to weigh on markets, with sentiment turning to the downside as investors consider upcoming risks after a period of strong performance. Against this backdrop, the portfolios declined over the week, eroding some of the strong performance gained earlier this year.
After a tough week for the portfolios and markets as a whole, it is important to highlight that recent volatility has not come as a surprise, and following our recent actions to reduce risk exposure within the portfolios, we are now primed to take advantage of new opportunities when this short-term uncertainty passes. As uncertainty lingers over the coming weeks, it’s our view that risk assets with stretched valuations may be susceptible to a further sell-off in the short term, however by choosing our equity exposure carefully, maintaining healthy cash levels and with high levels of diversification, we can navigate this bout of volatility and start to regain lost ground. Overall, we are prepared for further volatility in the short term, however our long-term outlook remains positive, backed up by supportive economic fundamentals and an improving global vaccine situation.
Looking at equity market performance over the week, US equities continued to erase their year-to-date gains, with US firms particularly susceptible to profit taking following outperformance over the past 18 months, combined with a sharp rise in government bond yields. Global government bond yields reached 3-month highs on tightening expectations, resulting in declines in US markets, with the largest technology firms suffering the most over the week. Alongside continued speculation which has caused the recent increase in yields, investors have exhibited concern over the US’ debt ceiling ahead of a key deadline, albeit analysts agree that this will likely rise in the coming weeks, diminishing default concerns for equity markets beyond the short term.
Equity market performance was similar within Europe, with negative sentiment fuelled by rising energy prices and inflation fears over the coming months. As we are all aware, UK headlines had been dominated by the panic buying of fuel due to a shortage of fuel delivery drivers. Although fuel concerns have abated this week, we expect higher energy prices across the globe as we enter the winter months, with commodity prices rising and electrical infrastructure becoming overwhelmed by demand.
In Asia, financial markets remained volatile, as Japan became the worst-performing region over the week due to concerns over the region’s new government and potential for slower growth in the short term. The worst performers over the week were Japanese technology firms, selling off similarly to US technology firms due to rising government bond yields. Chinese equities have been slightly more stable this week, albeit it is worth noting the steep underperformance from the region in recent months. In addition, we expect the Evergrande saga to contribute to volatility within the region over October.
Looking towards the non-equity sector performance, while we typically see bond demand rise as risk assets sell-off, the strengthening inflation outlook is causing bond prices to fall, pushing 3 out of 5 sectors to year-to-date losses. This macroeconomic influence also explains the positive weekly performance in the Index-Linked Gilt sector, whose fixed payments rise in line with the expected inflation rate.
With negative sentiment impacting asset prices this week, it was expected that the OBI portfolios would fall over the week. OBI 3 to 5 fell less this week than the higher risk portfolios, reversing the pattern witnessed in last week’s commentary, while OBI 6 to 8 suffered as the equity exposure dragged on portfolio performance. Although some of the OBI portfolios have fallen further than the benchmarks this week, the higher cash weighting within the OBI portfolios is expected to help mitigate falling equity prices if risk assets continue to suffer in the short term. As it stands, we have not seen an improvement in the data and market sentiment to justify returning to our normal portfolio allocation, however, we expect well-placed opportunities to arise over the weeks ahead as the outlook clears and valuations become more attractive.
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.
** When reviewing the above performance data, it is important to point out that while we can see that the indices have fallen, the dataset suggests that the indices have fallen by less than the OBI and AFI portfolios. This is not the case, as the performance of the index includes the impact of a positive trading session yesterday, however this has not yet fed through into the portfolio data shown in the table. The discrepancy in the timing of performance data is not usually an issue during stable market conditions, however it will become exacerbated during times of elevated market volatility, as we are currently experiencing.
Key Events We Are Watching This Week:
- Friday 8th: US Non-Farm Payrolls, September.
- Wednesday 13th: UK GDP YoY, August.
This Day in History
On October 6, 1866, the brothers John and Simeon Reno stage the first train robbery in American history, making off with $13,000 from an Ohio and Mississippi railroad train in Jackson County, Indiana.
Thank you for reading, have a great week!
Jason, Gina & Ben
