Royal London market update

Read the latest market update from Royal London

Equities

Global equities falling for only the second month this year and the inversion of the US yield curve, which has traditionally signalled a recession, showed investors feared escalation of US-China trade tensions could undermine global economic growth.

The Federal Reserve followed July’s rate cut by further reducing interest rates with a 0.25% cut designed to help the US deal with a slowing Global economy and increasing trade tensions.   Trump was demanding more significant stimulus and is counting on a strong economy fuelled by cheap money to boost his re-election chances next year.  How independent the Fed can remain in light of Trump’s pressure remains to be seen.  Further rate cuts are expected before the end of the year.

In the UK, markets fell by around 4% during August as the uncertainty around Brexit continues. Sterling continues to be volatile on a day to day basis.  The pound fell by around 2% in one day as the PM suspended parliament before bouncing back the next day as the Tories almost immediately lost their parliamentary majority.  Since this point Sterling has appreciated by around 4% - however, at the time of writing the UK Supreme Court has just ruled this suspension unlawful.  We await the fallout of this, but one thing you can be sure of is continued Sterling volatility over the coming months.

We remain overweight equities in our portfolios although we have taken some profits after recent strength, but remain broadly constructive on the outlook for stocks.

Bonds

During August UK Gilt yields continued to fall with yields reaching record lows, leading to strong returns for both Conventional and Index Linked Gilts.  Although September has seen the 10 year yield tick up by about 10bps which has given back some of August’s gains.  Both Investment Grade and High Yield credit underperformed conventional Gilts over the month.

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

Property

2019 has seen a lot of uncertainty in the UK Commercial Property space due to the lack of an agreement over Brexit.  This is reflected in the performance of property year date which has delivered a similar return to cash as rental income has broadly offset capital depreciation. Looking to the end of October a no deal Brexit would be the worst case scenario as the value of Sterling would likely fall and property prices would trend in the same direction. If No Deal is avoided, Sterling would likely rise and the popularity of UK Property would 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

Commodities returns were negative again in August as uncertainty surrounding the US China trade war fed expectations of a global economic slowdown which would reduce demand for raw materials.

We are currently marginally underweight commodities across our portfolios.

Equities

Global Equity markets performed strongly in July, with the S&P500 in the US again reaching record highs. However, this optimism was short-lived as both the US and China announced further tariffs in August which led to July’s gains being wiped out in a matter of days. We also saw the 2yr/10yr yield curves inverse for the first time since 2008 which also spooked markets as this is seen as a key recession indicator. The good news from this is the average time between yield curve inversion and the beginning of a recession is 14 months, with equity markets growing by an average of over 20% over this period, so we could still be some way off a recession.

The Federal Reserve cut interest rates by 0.25% to help the US deal with a slowing Global economy, and we expect further cuts before the end of the year.

In the UK, growth remains flat as the uncertainty around Brexit continues. Sterling volatility picked up throughout July and August as Boris Johnson became the latest Prime Minister to attempt to steer us through Brexit. Debate over the Irish Backstop and the Prime Minister’s threat to close down Parliament to push through a No Deal sent the Pound tumbling to its lowest level against the Dollar since the mid-80s.

We remain slightly overweight equities in our portfolios and increased our allocation earlier this month to take advantage of current market conditions.

Bonds

UK Gilt yields continued to fall due to the increasing likelihood of a No Deal Brexit, leading to strong returns for both Conventional and Index Linked Gilts. Both Investment Grade and High Yield credit outperformed conventional Gilts over the month due to interest rate cuts in the US, with a preference for higher quality debt.

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

Commodities returns were negative in July. Oil was broadly neutral whereas Agriculture returns were weaker due to an increase in supply. Precious metals were the top performer, driven primarily by lower yields in the US.

Equities

Global Equity markets rebounded from a poor May to show positive returns in June continuing into the beginning of July, with the S&P500 reaching record highs. Although the Global economy is still slowing, the prospect of interest rate cuts boosted returns. Both the US and China agreed to resume trade talks after the most recent stalemate which also supported growth.

The beginning of July marked the longest US economic expansion since records began, with the latest period of strong performance being led by the Energy and Tech sectors. FANG stocks – Facebook, Amazon, Netflix and Google – along with Microsoft and Apple, have all returned around 40% since the beginning of the year, making the Tech-heavy NASDAQ index one of the strongest performers globally. Energy stocks were boosted by a rising oil price fuelled by reduced inventories and a potential conflict between the US and Iran.

In the UK, growth remains flat as the uncertainty around Brexit continues. Sterling volatility has been at its lowest throughout June since the vote to leave in 2016, although this is being attributed to the Conservative leadership contest as we waited to see who our next Prime Minister would be. We do expect this to pick up over the coming weeks once Boris Johnson restarts conversations regarding the withdrawal agreement with the EU.

We remain slightly overweight equities in our portfolios and increased our allocation earlier this month to take advantage of strong market conditions.

Bonds

Gilt yields continued to fall globally as the prospect of rate cuts increased, leading to strong returns for both Conventional and Index Linked Gilts. Both Investment Grade and High Yield credit outperformed conventional Gilts over the month as trade tensions between the US and both China and Mexico dissipated. Cyclical holdings such as Financials and Manufacturing outperformed more defensive assets such as Healthcare.

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

Commodities returns were positive in June. Oil performed strongly due to a reduction in supply along with increased tensions in the Middle East. Precious metals also rallied as Treasury yields fell, with Gold a top performer, and Agriculture was broadly flat for the month.

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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.