Politics dominated the headlines in September – think Brexit, North Korea, Catalonia – but it was actually the strength in sterling which had the biggest impact on returns for UK investors.
A mixed outlook for UK growth and continued uncertainty over Brexit has heaped huge pressure on the pound over the past 18 months. Sterling fell 20% against the US dollar in 2016 alone, and many currency commentators had been pencilling in parity to the dollar for 2018.
However, it took the release of a hawkish set of Bank of England minutes in September – and growing concerns over rising inflation in the UK – to cause the first proper rally in sterling since the Brexit vote. In the month, sterling rose 4.5% against the Euro and 4% versus the US dollar.
The currency moves acted as a clear headwind for overseas markets, and meant asset prices across the board were negative, despite rising in local currency terms.
The S&P 500 fell 2%, Japanese equities by the same amount, while Emerging Market equities fell nearly 5%.
Over in the bond world, the inflationary pressures heaped pressure on yields and we saw a meaningful fall in bond prices in the month. Gilts sold off 2.7% and global fixed income fared worse, due to the strength in sterling.
September was definitely a month when the safety of cash was the best place to be.
The difficult period for investment markets discussed above led to losses for all the Flying Colours portfolios.
The Dynamic portfolios all marginally outperformed the Core, helped by the defensive fixed income positioning (favouring cash over gilts) and solid performance from some of our active equity picks (in the US, Asia and UK).
Returns ranged from -2.2% for Core Defensive to –1.24% for Dynamic Aggressive
Returns were around 25bps to 100bps behind the ARC benchmarks as the peers typically have higher weights to sterling.
Chairman, Flying Colours Investment Committee