17 October 2017

Confidence remains, for now.

Equity markets have marched steadily higher through the year, with the technology sector and Emerging Markets leading the troop.


In local currency terms, the MSCI Emerging Markets Index has returned over 20% in 2017, while the NASDAQ Composite Index (that has a large weight in US tech giants such as Apple, Microsoft and Amazon) has achieved similarly outstanding performance. Such sectors have historically been relatively volatile and have endured some difficult periods, but it is clearly feast here for now. London markets have been less impressive and have struggled to break above all-time highs made in June this year. Nonetheless, the FTSE All Share’s 5% price return year-to-date is still reasonable relative to the 115 year average annual real return (excluding inflation) on UK equities of 5.0% that Barclays give in their Equity Gilt Study.

There was a brief “risk off” period at the end of August when a combination of North Korean tensions and hurricane uncertainty saw investors flee to assets viewed as safe havens, namely gold and sovereign debt. Confidence has since returned on the back of persistently positive economic data and renewed hopes that President Trump may yet be able to make progress in his push for lower taxes and US infrastructure investment. Some examples of the encouraging economic indicators that emerged during the period include the European Purchasing Managers Index (an indicator of the manufacturing sector’s health) hitting an all-time high in September and, at a more niche level, sales of luxury Swiss watches to China also reaching new record levels. Given the steady stream of positive news, combined with ongoing central bank stimulus, it is unsurprising that risk assets performed well.

While markets remained in optimistic mood at the month-end, supporting high valuations, it must be remembered that this monetary stimulus from central banks still qualifies as extraordinary circumstances and that we have no historic precedent for how such an extended period of loose policy can be unwound. Mark Carney has stated that he expects UK interest rates to rise in the “relatively near term” and Janet Yellen has made similar hints on Federal Reserve policy.   It will be a remarkable achievement if this transition is managed smoothly but for the time being inflation remains in check and markets are confident.


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