Royal London market update

Read the latest market update from Royal London

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.

Equities

Global Equity markets faced a tough May/June as trade tensions worsened. Not only did Donald Trump toughen his stance on China, but there was also a threat of tariffs on Mexico if they didn’t stem the flow of migrants crossing the border into the US. The threat against Mexico has receded slightly, however it leaves business uncertain about where future US policy is headed. Despite these bouts of volatility, markets returns have been relatively flat over the month.

Underlying data suggests global markets will continue to slow, however there is sufficient evidence showing it’s unlikely that there will be a significant downturn in the short-term. We also expect the US Federal Reserve to cut interest rates at least once in the second half of 2019 which will stimulate the US economy and reduce fears of a recession.

In the UK, growth remains flat as the uncertainty around Brexit continues. There’s unlikely to be any movement on that front until a new Conservative party leader is appointed at the end of July. However, whoever the new Prime Minister is, the composition of MPs in Parliament does not change, and given they are against both No Deal and the current deal on the table, we expect this uncertainty to extend over the coming months.

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

Bonds

Gilts, particularly Index Linked Gilts, have performed strongly since the beginning of the year due to falling yields, returning 8% YTD. Both Investment Grade and High Yield credit underperformed conventional Gilts over the month as trade tensions escalated. Trade-dependent sectors such as automotives and mining led the underperformance with energy sectors also declining. Industries insulated from potential global trade disruptions, such as Healthcare, outperformed the broader market.

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 delivered negative returns in May, however they picked up in the first half of June due to heightened tensions between the US and Iran pushing oil prices up. The Agriculture sector also produced strong returns as some extreme weather in the US restricted supply of crops.

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 almost 20% since the beginning of the year, with UK market lagging slightly behind at 15%. This has mainly been down to the Fed’s apparent reluctance to raise interest rates again until nearer the end of the year. However, President Trump toughening his stance on China has led to a volatile start to May, with US stocks falling over 5% over the first couple of weeks but bouncing back to even just a few days later.

The European Central Bank (ECB) left interest rates unchanged at their April meeting as was expected, and they expect rates to remain at their current levels until at least the end of 2019 due to low growth forecasts heading into 2020.

In the UK, Brexit is again dominating the headlines. At the time of writing, Theresa May has announced she will step down as leader of the Conservative party on 7 June but will remain Prime Minister until a new Conservative party leader is appointed. Due to the process of appointing a new leader of the party, we would expect this to be decided in a matter of weeks. The Pound fell sharply following the news and the FTSE 100 gained roughly 1% due to currency fluctuations benefitting overseas earnings in the Index.

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

Bonds

March’s UK Gilt price rally was reversed in April as yields rose on the news of the Brexit deadline being extended to 31 October 2019. Both Investment Grade and High Yield credit spreads tightened which led to positive returns for both, primarily driven by outperformance in the automotive and telecom industries due to an increase in potential merger and takeover activity.

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, where the US announced sanctions against oil exports. Agriculture also performed poorly as corn saw supply outstrip demand.

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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.