Royal London market update

Read the latest market update from Royal London

Equities

Global equities have performed strongly over the past few weeks with US markets hitting record highs and European stocks rising to their highest level since 2015, all off the back of more positive news coming from trade talks between the US and China. The S&P500 has returned over 5% in the last 4 weeks and the FTSE has seen a similar rise since the beginning of October.

President Trump has intimated that Phase 1 of a trade deal between the US and China is almost complete, although this could be derailed by China’s handling of the current situation in Hong Kong. The US Senate recently voted to back protestors in Hong Kong which has been seen as a challenge to the Chinese Government, meaning we could see weeks or months of political posturing from both sides before any deal is signed.

Politics continue to dominate UK markets. Parliament voted for a General Election on 12 December which is effectively a Brexit election. Markets initially reacted well as the Conservative party took a strong lead in the polls, however their current 11 point lead is far less than the 18 point lead they had in 2017 which resulted in no party gaining a majority. If the Conservatives are unable to gain a majority in December’s election, we would expect to see a second Brexit referendum and an increase in market volatility as uncertainty continues.

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

UK Gilt yields increased slightly over the month as they continue to bounce back from record lows in August, leading to a small loss in Government Bonds over the month. This was down to a strengthening Pound as markets predicted a Conservative majority in the upcoming election. Investment Grade and High Yield credit outperformed Government Bonds 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 to date which has delivered a similar return to cash as rental income has broadly offset capital depreciation. Looking to the final Brexit outcome, leaving without a deal 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

Commodity returns were positive in October as agriculture was boosted by the potential trade deal between the US and China. Base metals, led by Zinc and Lead, performed strongly whereas precious metals were a detractor.

We are currently marginally underweight commodities across our portfolios.

Equities

Global equities have been extremely volatile over the past few weeks due to the twists and turns of Brexit negotiations, ongoing discussions relating to US and China trade talks, and the potential impeachment of the US President, although returns have been relatively flat.

US equity markets benefited from a reduction in trade war concerns as both parties agreed to delay tariffs. China also agreed to purchase over $20bn of agriculture products a year from the US as part of the latest round of talks. However, gains from this quickly diminished as it was reported President Trump was being investigated for attempting to pressure the Ukrainian President into investigating a potential presidential opponent.

Politics continue to dominate UK markets. Returns were initially boosted by the news the UK Supreme Court declared Boris Johnson’s prorogation of Parliament was unlawful, which boosted Sterling, however this was short-lived as it fell again as we move closer to the 31 October Brexit deadline. The Government finally came to an agreement with the EU over a new Withdrawal Agreement which was swiftly rejected by Parliament, forcing the Prime Minister to ask the EU for a further extension until 31 January 2020.

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

UK Gilt yields increased slightly over the month as they bounced back from record lows in August, leading to a small loss in Government Bonds over the month. Investment Grade and High Yield credit outperformed Government Bonds over the month, however still posted a negative absolute return.

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 to date which has delivered a similar return to cash as rental income has broadly offset capital depreciation. 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

Commodity returns were positive in September as agriculture was boosted by the potential trade deal between the US and China. Base metals, led by Zinc and Lead, performed strongly whereas precious metals were a detractor.

We are currently marginally underweight commodities across our portfolios.

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.

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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.