After a strong start to September, portfolio performance remained relatively unchanged this week, as investors continue to speculate about the timing of stimulus tapering by central banks, while the spread of the delta variant continues to undermine the pace of recovery in economies across the globe.
While economic data continues to support expectations for a strong recovery, concerns over the delta variant have been driving downside risks this week, tempering risk-on sentiment within markets. Following a large miss on September’s jobs numbers, US equities rose on expectations for a delay in Fed tapering and ‘buy the dip’ momentum, with investors choosing to look through the negative data. However, with the pace of US recovery now showing signs of slowing as consumers pull back on spending due to safety concerns, US markets closed marginally lower over the week.
After a period of weakness owing to regulatory change and renewed pandemic risks, gains in Asia were led by Japan, where the index rose to a 31 year high on wagers for new economic policies once Prime Miniter Yoshihide Suga steps down. In China, despite ongoing regulatory risks, the index moved to offset some of its recent declines following positive economic data releases and stimulus hopes. That being said, in the latest update in China’s regulatory overhaul, China’s technology stocks declined during today’s trading session after officials told firms to end their focus on profit in gaming, highlighting the ongoing challenges for Chinese stocks across a number of at-risk sectors.
Across Europe, markets were weighed down by growth concerns towards the end of the week as investors awaited the outcome of the European Central Bank’s latest policy meeting, searching for clues about the tapering schedule and speed, as well as the central bank’s take on inflation. Earlier today, the ECB announced it will slow down the pace of its pandemic bond-buying programme later this year in the wake of rising inflation and solid growth projections. Markets reacted positively to the announcement, with guidance remaining in line with expectations. UK equities also declined over the week as concerns over slowing economic growth hit commodity and financial stocks while investors also digested new plans to hike taxes on workers, employers and some investors to pay for social care costs and the NHS, weighing on short-term sentiment.
As we typically see during periods of heightened volatility in markets, all of the non-equity sectors monitored in the dataset below gained over the week. After a period of weakness, Index-Linked Gilts gained as the spotlight turned back to central bank policy and inflation expectations ahead of the ECB meeting, with the remaining sectors experiencing small gains over the week, illustrating a lack of general direction across the full week.
Against this backdrop, the OBI portfolios remained relatively flat over the week, benefitting from a strong level of diversification in terms of sectors and geographies. OBI 3 to 5 benefitted from their higher weighting to non-equity assets over the week, while negative equity performance dragged on OBI 6 to 8 performance. In comparison, the benchmarks benefitted from their higher exposure to Chinese equities which rebounded this week, however it is our view that we are likely to see more pressure on these assets over the coming weeks due to continued concerns over slowing growth and regulation.
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.
Our Positioning
While our positive outlook remains unchanged, market conditions are expected remain volatile in the short term, as we navigate rising delta cases and continued uncertainty over inflation. Following the conclusion of our quarterly Investment Committee Meeting this week, in the coming days we will be making some changes to the portfolio allocation to ensure we are best positioned to navigate markets in the months ahead.
After experiencing strong performance so far this year, it is our view that we have now progressed to the next stage of the cycle, and that sector and geographical exposure will become increasingly important in the weeks ahead, given stretched valuations and slowing growth in certain areas of the market. As a result, we will be making some tweaks to our exposure. Firstly, following this week’s partial rebound, we will be removing direct exposure to Chinese equities as a result of regulatory risks and slowing growth expectations, in favour of sustainable Asian exposure with aspirations more aligned with the Chinese Communist party’s goals. At the same time, we will also be adding extra inflationary protection to the portfolios to reduce the risk of inflation shocks as we move further through the year, adding exposure to infrastructure and index-linked bonds which are well positioned to perform in the months ahead. In addition to this, we will be rebalancing the existing portfolio holdings to take profit on our positions following a period of exceptional performance, allowing us to reset the portfolios ahead of the next quarter.
Overall, the outlook remains positive over the long term, however it is our view that the changes outlined above will allow us to navigate the changing economic backdrop as the economic recovery continues.
Should you have any questions about any of the above, don’t hesitate to get in touch.
This Day in History
On this day, in 2015, Queen Elizabeth II became the longest-reigning monarch in British history, surpassing Victoria’s record reign of 63 years and 216 days.
Thank you for reading, have a great week!
Jason, Gina & Ben
