Investment Bulletin

Autumn 2018


In the developed world, the US is leading the way in monetary tightening cycle and this looks set to continue. This has led to US dollar strength this year. Meanwhile, as is often the case, the effects of a strengthening dollar are seen most acutely in Emerging Markets, where the cost of servicing dollar denominated debt continues to increase.

This quarter, we saw the S&P 500 record its best quarter since 2013 and its third best since 2010. This came at an unusual time, as historically, the third quarter of the midterm year is on average, the second worst of the four-year cycle. This is usually the time when the government is removing stimulus but this year, tax cuts have reversed this pattern.

We continue to keep an eye on interest rate trends, with the latest Fed rate rise taking place on Thursday 26th September to 2.25%. There is, however, still a healthy premium on earnings yields over bond yields and this gives an element of safety margin. This is most noteworthy within the UK, Europe and Japan, where bond yields remain low.

Bond markets have continued to weaken during the recent period, with the US 10-year bond yield breaking through 3.0% once again and the politically unsettled UK 10-year Gilts nudging 1.6%. This seems likely to continue, at least in the UK, with labour markets tightening and Brexit uncertainty potentially weakening our currency yet further.

Elsewhere, the Japanese currency looks good value and this helps underpin weightings to Japanese stocks, which have been very helpful over the past couple of years, under the steady political climate created by Prime Minister Abe. The US continues to underpin developed market valuations with economic growth. However, the initial signs of real wage growth and other inflationary pressures in the US, might lead to a faster pace of rate hikes than is currently anticipated by investors. 

Perhaps a possible area of positive surprise, could be the UK, where dividend yields offer real returns at c.4% and despite bleak headlines, it is surely in the interest of Europe, Britain and Northern Ireland to find some level of compromise within the Brexit negotiations. With Northern Ireland still firmly independent of Eire, this could be an Achilles heel for Mr Barnier that Mrs May will be keen to exploit.

The final critical benchmark to consider, is the rate of inflation. Currently interest on income orientated assets, and earnings yields on equities, offer real returns. The acid test over the year ahead, is whether this position can be maintained. If it can, we can see further positive absolute returns in the year ahead.

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