The third quarter followed promptly on the heels of the UK’s historic and largely unexpected decision to exit the European Union.
The immediate aftermath saw sterling plunge to its lowest level against the dollar in three decades and London’s major banks saw their value sink by the biggest amount since the 2008 financial crisis.
However, this initial panic subsided with news of the Bank of England’s promise of £250bn of further quantitative easing, as well as the general expectation that a weaker pound would help many UK companies.
Fears of prolonged market turmoil proved misguided as UK markets soared, the worst-case scenario of a leave outcome failing to materialise in the very short term. The FTSE 100, dominated by companies earning revenue in dollars, surged to near-record levels.
The UK government’s announcement of a timetable to trigger Article 50 raised fears of a hard Brexit. Prime minster Theresa May ended weeks of speculation and revealed formal talks with EU leaders would be launched before the end of March 2017.
Currency consequences
Sterling plummeted once more on the back of this declaration and, although the continued weakening in currency proved advantageous to markets, the possibility of the UK leaving the single market could have significant repercussions for London’s position as a financial hub, and subsequent negative consequences for the broader economy in the longer term.
That said, the economy grew by 0.5% during the quarter compared with the preceding quarter’s 0.7% growth pace. Expectations are that the Bank of England is now likely to leave its benchmark rate unchanged in the short term. Government purchasing of bonds has continued to suppress yields, and in the UK bond prices rose along with equities.
Oil prices fluctuated between $40-49 a barrel during the quarter. More recently, in September Opec struck a deal to limit production in an attempt to stabilise prices.
Gold prices had been relatively stable during Q2 at $1,300-1,360. At the time of writing we witnessed a rally in gold in response to the largely unexpected result of the US presidential election.
However, this flight to safety proved short-lived as Donald Trump made clear his economic policies would revolve around lower taxes and increased spending, prompting expectations of an eventual rise in inflation and interest rates (see news, p8).
European markets remain difficult, with slow economic growth and political uncertainty in numerous countries, although equity markets made early gains.
Following the surprise over Brexit and Trump’s victory, questions have surfaced about the potential for similar outcomes in near-term presidential elections in France, as well as polling in Germany and a referendum on the constitution in Italy.
Strength in depth
Global equity markets as a whole proved resilient to European political upheaval, with emerging markets the strongest performer during the quarter, aided by encouraging economic data out of China and the Fed’s delay on raising interest rates.
In terms of individual equity market returns during the quarter, the FTSE 100 (capital only) increased by 6.1%, European equities were up by 5.1% in euro terms (MSCI AC Europe) and the US by 3.3% in dollar terms (S&P 500). Emerging markets increased by 8.3% during the quarter (MSCI EM Emerging Markets) and the Nikkei 225 in Japan by 5.61%.
Government bond prices returned 2.1% in the UK, -0.4% in the US and 0.5% in Europe. Oil prices decreased by 1.2% and the gold price was down 0.5%.
During the quarter, the Trustee Managed Portfolio Indices produced positive returns across the three risk profiles: the low-risk index returned 3.7%, medium-risk 5.1% and high-risk 6.4%. Positioning in US and European securities will have been beneficial to portfolio performance due to sterling depreciation of 2.5% versus the dollar and 3.8% versus the euro.
Carry on to the next page for more insight into low, medium and high risk portfolios…
