Royal London market update

Read the latest market update from Royal London

Equities

Global Equity markets continued their recovery over the past month, with the UK, US, Europe and Emerging Markets all showing positive returns. In the US, the S&P500 index is up over 16% since the beginning of the year, with UK market lagging slightly behind at 13%. This has mainly been down to the Fed’s apparent reluctance to raise interest rates again until nearer the end of the year, along with a potential trade agreement between the US and China. This also boosted Chinese markets which have returned an incredible 25% since the turn of the year and 9% alone over the past month.

European markets also rallied over the month with the European Central Bank (ECB) following the Fed’s lead in pushing out potential rate rises.

In the UK, all roads again lead to Brexit. The EU agreed to the UK’s terms to extend the deadline to 31 October this year. There’s the possibility of Meaningful Vote 4 taking place before the European elections on the 23rd May as the Government tries to avoid taking part. Despite this, UK Equity markets continued to grow as the possibility of a softer Brexit encompassing a customs union before October rises.

We remain slightly overweight equities in our portfolios but reduced our allocation earlier this month to take some of the profit gained over the past few weeks.

Bonds

UK Gilt yields fell during the month as the Bank of England sounded more cautious on future rate rises which led to positive returns. Both Investment Grade and High Yield credit spreads tightened which led to positive returns for both, the main catalysts being central banks being more dovish along with the anticipation of a positive outcome from the US/China trade talks.

We’re broadly neutral in both Gilts and Corporate Bonds and slightly overweight High Yield with our preference in shorter duration.

Property

The first quarter of 2019 has seen a lot of uncertainty in the UK Commercial Property space due to the lack of an agreement over Brexit. No Deal would be the worst case scenario as the value of Sterling would fall and property prices would trend in the same direction. If No Deal is avoided, Sterling would rise and the popularity of UK Property would likely increase, especially among international investors. We’re currently neutral Property in our portfolios, but have a preference for industrial property over retail which continues to slow.

Commodities

Commodity returns have been mixed over the past month. Oil continued to perform strongly due to tightening production in Saudi Arabia and disruptions in supplies from South America, specifically Venezuela. It was a mixed bag for Agriculture as corn performed poorly due to increased supply whereas wheat prices rose due to heavy snow in the US which limited production. Metals were relatively flat with the exception of Palladium which fell sharply over the month.

Equities

Global Equity markets continued to strengthen, with the UK, US, Europe and Emerging Markets all showing positive returns. In the US, the S&P500 index is up almost 13% since the beginning of the year, which is well over an average year’s gain in less than 3 months. This has mainly been down to the Fed’s apparent reluctance to raise interest rates again until nearer the end of the year, along with a potential trade agreement between the US and China.

In the UK, all roads again lead to Brexit. The Government were defeated on a number of votes, including one where the Prime Minister voted against her own amendment! The one vote which has passed in the last few weeks is an agreement to delay Article 50 beyond the 29th March. This now needs agreement by the EU which we would expect to happen by the end of this week. Despite this, UK Equity markets continued to grow as investors’ further rule out the likelihood of leaving the EU with No Deal.

Emerging Market Equities strengthened on the news the US were removing trade tariffs which were due to be implemented at the beginning of March.

We remain slightly overweight equities in our portfolios but reduced our allocation earlier this month to take some of the profit gained over the past few weeks.

D-Day for May

Staying with Brexit, a majority of Conservative party members would reject Theresa May’s proposed Brexit deal in favour of leaving the EU with no deal in place, according to a survey by the Economic and Social Research Council. The survey of 1,215 Conservative Party members found that 59% opposed May’s deal, with 38% in favour, with more than half the members questioned saying they did not believe that the proposed deal respected the result of the 2016 Referendum.

Outside of her own party, May’s deal faces opposition from the Labour party based on its failure to pass their six key tests, in addition to the DUP and Scottish MP’s, both of whom oppose the deal primarily due to the special status afforded to Northern Ireland. With no further rounds of negotiation between the EU and the UK on the table and Theresa May’s deal struggling to gain support, the prospect of leaving under a no deal scenario, or even a second referendum, appear to becoming increasingly likely.

May is expected to hold the delayed parliamentary vote on her Brexit deal on Tuesday, 15th January, according to government sources.

Bonds

UK Gilt yields have risen slightly over the past few weeks due to the reduced likelihood of the country leaving the EU without a deal. Both Investment Grade and High Yield credit spreads tightened which led to positive returns for both, the main catalysts being better-than-expected earnings growth along with the anticipation of a positive outcome from the US/China trade talks.

We’re broadly neutral in both Gilts and Corporate Bonds and slightly overweight High Yield with our preference in shorter duration.

Property

The first quarter of 2019 has seen a lot of uncertainty in the UK Commercial Property space due to the lack of an agreement over Brexit. No Deal would be the worst case scenario as the value of Sterling would fall and property prices would trend in the same direction. If No Deal is avoided, Sterling would rise and the popularity of UK Property would likely increase, especially among international investors. We’re currently neutral Property in our portfolios.

Commodities

Oil prices extended their previous gains due to expectations of falling production; Saudi Arabia announced production cuts and US sanctions on Venezuela targeted their crude oil exports. The majority of precious metals declined, however platinum rallied as it benefitted from increase industrial demand. We’re currently underweight Commodities.

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Equities

Equity markets continued to rebound from December’s collapse with the FTSE hitting 7,200 for the first time since the beginning of October. In the US, the Federal Reserve held interest rates at 2.5% and hinted a slowdown in rate rises, which led to a rally in the S&P500 Index. Elsewhere, other Global stocks performed strongly on hopes of progress in the trade talks between the US and China and reduced production contributed to the oil price rising to a three-month high. Europe also rebounded, although regional issues such as the ‘Yellow Vest’ protests in France and the shrinking of Italy’s economy continue to worry investors.

We’re currently slightly overweight equities but have moved significantly towards a neutral position in recent months due to the uncertainty surrounding Brexit and the US/China talks. Regionally, we’re overweight US, Japan and Emerging Markets and underweight the UK and Europe.

Bonds

Gilt yields have remained broadly flat since the beginning of the year, although prices have risen slightly as investors move to more defensive assets in the lead up to Brexit. Both Investment Grade and High Yield credit spreads tightened which led to strong returns for both, the catalyst again being the Fed’s statement along with solid earnings results which were above expectations.

We’re slightly overweight Gilts at the moment as we reduce our risk exposure in the lead up to Brexit. We also have a small overweight position in Corporate and High Yield Bonds as we reduce exposure to less attractive assets such as Commodities and Cash.

Property

Increased scrutiny on illiquid assets by the regulator has led to a number of fund managers and providers in the industry having to rethink the amount of cash their funds hold in the lead up to Brexit. We’re comfortable with the amount of cash held in our Property fund at Royal London, and this has led to a number of potential buying opportunities for us as other providers and asset managers sell properties in order to raise their cash levels.

Commodities

Gold, Copper, Silver and Palladium prices have all risen so far this year which has led to strong start to the year for Commodities, which has also benefited from the rising oil price. We’re currently underweight Commodities due to ongoing concerns over the US and China trade talks.

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Last updated: 28 Sep 2018

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.