Welcome to our third quarterly newsletter

Introduction

Welcome to our third quarterly newsletter. A lot has happened in the market this quarter so we will try and cover the main topics.As always, if there is anything we have missed and you would like us to cover in our next update, please do not hesitate in letting us know.

Global Markets
 
During the third quarter of 2018, we have seen some of the highest volatility in markets since the financial crash in 2008. October has a tradition of being a fairly unstable month in terms of investments and markets, and it well and truly lived up to its reputation.


In the last 3 months we have seen falls in all major worldwide markets including the FTSE 100 (UK) -7.87%, the EuroStoxx 50 (Europe) -9.58%, the S&P 500 (US) -4.34% and the Hang Seng China Enterprises (China) -8.76%.

After reaching all time highs in May, the FTSE 100 (top 100 UK companies) was one of the first to suffer this quarter as Brexit volatility continued following several resignations from Theresa May’s Conservative party, including Brexit secretary David Davis and Foreign Secretary Boris Johnson. Both had concerns over May’s “soft” Brexit stance. Although gaining some ground mid-quarter, sterling continued on its downward trajectory, while UK equities gave back some of the gains made in the second quarter.

The Bank of England (BoE) raised interest rates by a quarter point in their August meeting, taking the benchmark rate to the highest level since 2009, while the European Central Bank (ECB) kept rates on hold, but confirmed they would be ending their quantitative easing programme in December this year.

We have also seen news on the ongoing uncertainty surrounding the Italian budget fears but this risk looks to be dissipating as the government seems to be softening their ideas on how to run the debt laden economy from their term in office.

Geopolitical tensions continued across the Atlantic, as President Trump implied that the US would be pressing ahead with tariffs on Chinese imports. However, a deal on trade was struck with the president of the European commission, Jean-Claude Junker, which supported European equities.

The one good point to take from the position of markets worldwide, and despite its recent downfall, is that the United States (the largest economy in the world), is in good economic shape. The gross domestic product (GDP) growth rate is expected to touch a decade high of 3%. A strong US economy is important globally along with a strong Chinese economy – both economies represent nearly 50% of global growth. This strong economic stance led the US Federal Reserve to raise interest rates by 0.25% for the third time this year.

Looking ahead, it is the view of many fund managers’ that the poor recent performance in markets worldwide is simply a period of volatility, and is not the onset of something more significant. The fund managers we have spoken to also believe that we find ourselves in a market that still favours equities over bonds and cash.

It has, however, been a disappointing year for equities globally - with only a few exceptions. These exceptions are mainly found in the technology sector and in the US in particular. Some of the largest and most famous US tech stocks have done well considering virtually all other asset classes (whether this is international equities, fixed income, real estate or commodities) have suffered losses.

One stat that we read earlier this month shows just how powerful technology companies are in today’s day and age. The five largest US technology stocks (Facebook, Apple, Amazon, Microsoft and Alphabet) now represent over 15% of the S&P 500’s index. The S&P 500 is the top 500 companies in the US. In August, Apple became the first company in history to reach a market capitalisation of one trillion dollars, followed a month later by Amazon. The 5 companies now have a combined market capitalisation of just over $4 trillion, equal to the S&P 500’s smallest 282 companies put together – and this huge list of the “smallest” companies includes many major household names such as Ralph Lauren, Kellogg’s, Goodyear and Gap.

Budget October 2018

Yesterday, Chancellor Philip Hammond delivered the final Budget before Brexit in the House of Commons. Mr Hammond declared that the era of austerity is “finally coming to an end” and laid out how his plans will help the hard working people in the UK.

During his 72 minute speech, there were numerous changes to forecast percentages, but some of the main points to take away from the Budget were as follows;

An additional amount of £500m is being given to government departments to prepare for Brexit.
Hammond said he is prepared to upgrade to a full Budget in spring, if necessary, instead of the usual spring statement.
Economic growth for 2018 was calculated at 1.3%.
Forecast for borrowing is to be £11.6bn lower in 2018-19 than forecast at the spring statement. That is equivalent to 1.2% GDP.
Hammond confirmed Theresa May’s pledge of an extra £20bn per year for the NHS by 2023, a £1bn boost for defence and £1bn more for Universal Credit benefits.
An extra £400m extra for schools in this financial year – which equates to an average of £10,000 per primary school and £50,000 per secondary school.
The government will now introduce a UK digital services tax which is predicted to raise around £400m a year. Digital tech giants will be taxed at 2% on the money they make from UK users from April 2020.
The government will provide £675m to create a “future high streets fund” that councils can access to redevelop their high streets.
Hammond says the government will provide a further £500m for its housing infrastructure fund, which will unlock 650,000 homes. The fund now stands at £5.5bn.

Aside from the points mentioned above, there was also good news for income taxpayers in the UK, as Hammond stated the government will meet its manifesto commitment to raise the personal allowance to £12,500 (currently £11,850) and the higher rate taxpayers’ threshold to £50,000 (currently £46,351) one year earlier than planned – in April 2019. The chancellor says this is because the OBR estimates for the public finances are better than expected.

Importance of Discretionary Fund Managers

It is no secret that when it comes to investments, we favour the use of model portfolio funds from providers such as Rathbones, VAM, and Brooks MacDonald to name just a few. Their ability to react quickly to market movements is in our opinion, invaluable, and this is often seen as a way of reducing risks for investors.

Multi-asset funds such as the model portfolio funds mentioned above, have been a staple in investor portfolios for decades, and are widely defined as diversified portfolios of investments that can generate returns as markets rise, as well as protect investors’ cash on the downside.

The arrival of a number of new regulatory rules, notably post-pension freedoms, have only increased the sector’s importance in recent years with investors requiring more flexible solutions that can provide them with a regular and steady income.

To meet the increased demand for multi-asset solutions today, the sector has evolved. Whilst a decade ago, many multi-funds would have looked very similar to a strategically “balanced” long only fund with a 60/40 split between equities and bonds, today multi-asset investors have a host of tools at their fingertips to help them achieve very specific goals.

The range of new funds coming to the market today offer investors an opportunity to choose a strategy that is not just aligned with their needs, but is also able to deliver a more realistic version of the type of outcome they can hope to achieve over a given time period.

Being completely independent, we have access to the whole of market and can choose which providers we wish to work with. We would, however, like to take this opportunity to give a special mention to Rathbones International who have picked up 2 awards in October for “International DFM of the year” at the International Adviser Global Financial Services Awards 2018.   

Currency

Brexit, as one would expect, is having a lot of influence on currency rates, especially where GBP is concerned.

Sterling hit a ten-week low this morning as concern about Britain’s departure from the EU led investors to largely ignore hopes of an “end to austerity” raised by Chancellor Phillip Hammond.

Last week the British pound recovered from 2 and half week lows but gains were limited because of continuing uncertainty about whether Theresa May can see of her opponents and secure Britain an exit deal from the EU.

May told parliament last Monday that the Brexit deal with Brussels was 95% complete, and she urged restive lawmakers to back her in the final stages of Britain’s exit from the EU, saying talks were in their most difficult phase.

Opponents in her own party and in the opposition have stepped up criticism of the deal May is trying to get, even if an imminent leadership challenge appears less likely.

While a leadership challenge may no longer be imminent, it remains at an elevated risk, which is placing the pound under downward pressure in the near-term. The Brexit mood remains negative for the pound, which could fall more sharply if a leadership challenge materialises in the coming weeks.

However, an agreement does not seem to be any closer so there is still the threat of a no-deal Brexit... and that is all that matters for sterling at the moment. The exchange rates are currently 1/ 1.2748 (GBP/USD), 1/ 1.1218 (GBP/ EURO), and 1/ 1.135 (EURO/ USD).