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12th October 2016
Market Commentary October 2016

market commentary for web

It might prove a challenge but I’m going to try not to use the ‘B word’ in this commentary.

Whilst the summer months are usually a relatively quiet affair for stock markets, this summer has been full of political and economic drama, worthy of a hit ITV Sunday night soap. Whilst initial focus has been on our own domestic situation, the markets have gradually become more globally orientated with their concerns.

The post-referendum markets feel as if they have been split into two phases, with the initial rally focussed on quality, defensive dollar-earning companies that have benefited from the marked depreciation in sterling. This initial rally powered the market higher whilst more domestically biased stocks lagged. However, as scant pieces of economic news surfaced that seemed to suggest the economy was performing better than expected, the rally started to be fuelled by more UK-focussed stocks. This was exacerbated by the Governor of the Bank of England cutting interest rates to the lowest level in history at 0.25%. This assuaged market concerns over the impact of the vote, though it does leave little room for monetary policy to manoeuvre if economic conditions deteriorate in the future.

All eyes are firmly fixed on the November Autumn Statement to see what support Chancellor Hammond may offer to the economy, more specifically house building and infrastructure spend. Having already abandoned Osborne’s pledge to balance the books by the end of Parliament it gives him leeway to capitalise on historically cheap Government borrowing costs of 0.70% for 10 year gilts. It does feel that this excessively cheap borrowing might have a finite life span as inflation starts to creep into the economy in 2017 due to a sharply weaker Sterling versus the Dollar and Euro which would put upwards pressure on Gilt yields.

Across the Atlantic, the two main areas of focus have been upon whether the Federal Reserve will raise interest rates, and the surge of support for Presidential candidate Trump. US economic data has been mixed over the summer, with robust employment figures countered by poor business confidence and generally weak Purchasing Managers’ indices. These conflicting pieces of data gave the Fed enough reason to hold rates at present levels whilst leaving the door open to a further increase before the year end, possibly after the Presidential elections in November.

What has been a surprise to many is how well Donald Trump appears to be polling, with the latest figures suggesting a marginal 2.5% lead for Hilary Clinton. It’s quite remarkable that he is so popular with the electorate, given that his campaign has been full of controversy. His particular political message does seem to resonate with a certain demographic in America that may not have experienced the economic recovery of the last 8 years and is disgruntled with the establishment. From a global perspective, it does seem that less centrist parties are gaining ground by tapping into this dissatisfaction. This is especially evident in Europe with the rise of AFD in Germany, the National Front in France and the Party for Freedom in the Netherlands. The potential success of Trump cannot be ruled out; and this could have serious consequences for the geo-political scene and the global markets.

Elsewhere in the world, there have been several interesting developments that have so far, largely, left markets unaffected. In China, the economic picture looks slightly healthier although the build-up of debt in the system has been vast and will lead to some serious policy challenges in the future. In Japan, the Bank of Japan – which has been in the vanguard of global monetary policy – has announced some slightly different policies that have left the market confused as to how effective they have been and whether their new strategy is actually possible. A deterioration of confidence in Central Banks seems likely; and this will have adverse effects on equity and debt markets globally.

Finally, what does the future of the European Union look like? The consequences of Britain leaving the EU are unknown for both sides of the equation but will Britain simply be the first in a long line of EU members that may want to leave? Especially troubling seeing as anti-EU sentiment is rising sharply across the continent.

As we head into the last few months of the year, we enter a world that is more uncertain than it has been in a long time. Global politics are evolving with the rise of Trump, the uncertainty over Article 50 and the surge in anti-EU rhetoric across Europe. Economics looks murkier still with global debt well over $200tn (well in excess of the $150tn at the start of the debt crisis in 2007), the future path of the UK economy uncertain, and globally declining profitability for companies.

To paraphrase John Maynard Keynes, the market can remain irrational for a lot longer than you expect; and we are acutely aware of this. We have taken steps to try and reduce risk within portfolios by holding higher than normal levels of cash and diversifying into lower risk assets for our clients. Our job is the stewardship of your capital; and with the growing risks around the world, we feel tilting portfolios towards capital preservation and not taking undue risks remains a prudent strategy for the short term. After the summer months, we are finding more appealing investment ideas and remain well positioned to capitalise on these opportunities as and when they arise.

I didn’t say Brexit, not even once…