Investment Commentary: October 2017
October was another strong month for investment markets. Both developed and emerging market equities produced meaningful gains, with global equities rising 3.1% in sterling terms.
Asian markets were the standout, with Japan, Korea and Taiwan all rising by as much as 6% to 9% following the Japanese election and a lull in North Korean tensions.
There are plenty of reasons for investors to be cheerful. Positive economic and market-driven data is widespread and continues across most key markets. Economic growth and confidence gauges are strengthening, especially in the US, Europe and China, while corporate profitability continues to improve and unemployment edges lower.
For us, as sterling investors, the Brexit negotiations loom large in the background but so far, financial markets have been able to look past the uncertainty. It is worth noting that while the outlook for the UK economy is far from clear post Brexit, the FTSE 100 is a very different animal. The index is dominated by large, overseas earners – approximately 70% of FTSE 100 earnings come from overseas, so the collapse in the pound is a positive here, not a negative.
While equity markets soared, fixed income markets saw more modest gains. Corporate bond funds rise around 60bps on average, while government bond funds were up around 0.30%.
Fixed income investors are digesting the first rate rise by the Bank of England’s Monetary Policy Committee in ten years. While more rate rises are inevitable, the pace of these rises are forecasted to be slow.
The Bank of England’s own forecasts are for inflation to gradually fall back to its 2% target by 2020 and market expectations – as priced in by market rates – are for just two more interest rate rises (bringing the base rate to 1%) by Q4 2020.