Media Centre

2nd October 2017
Market Commentary October 2017


The Calm Despite the Storm

Judging by markets’ recent performance, you could easily take the view that we are living in pleasantly stable times, with a steady and certain outlook. Whilst most markets have fallen slightly over recent months (Europe being one exception), it looks more like a consolidation after recent rises, because there has been a very significant absence of volatility. This seems at odds with markets now anticipating interest rate rises, as central banks start the “Great Unwind”. Nor have they reacted very much to escalating geopolitical threats (US and North Korea) and, closer to home, political turmoil amongst the minority Tory government and uncertainties brought by Brexit.

The market does seem remarkably, and unusually, calm. Any significant falls in equities have been greeted with fresh buying, as other asset classes such as bonds and cash remain unattractive; particularly if returns are viewed against heightened inflation. In our globalised world, the larger institutions are always searching for the best risk adjusted returns, and BRI is no different. Our view, quite simply, is that overseas equity markets have their individual attractions whilst our domestic economy is experiencing slowing GDP. The UK has recently slipped from number 2 amongst the fastest growing G7 economies to number 6. We foresee the coming months only adding greater uncertainty, particularly emanating from Westminster.

All economies are also suffering from excessive government debt, and the conundrum of how to reduce the stimulus of QE whilst maintaining this calmness in both bond and equity markets. Avoiding "taper tantrum 2" is a priority but increasing rates will increase personal debt repayments at a time when years of subdued or no wage growth is seen against consistent and rising inflation.

Back to the UK, there is now an increasing social outcry for pay increases across the board and this we expect to grow, with Labour helping to fuel these claims and encourage the unions to take action. Any action. During the election campaign, the return to their 1970s policies nearly won Labour the election, and this mandate will be held tightly and used to stoke anti-government feeling. Funny really, because the May government seems perfectly capable of generating this on its own.

With this uncertainty surrounding the UK it is right that we have been actively reducing domestic equity exposure and deploying to other international markets, and companies with more international earnings. Europe, as highlighted above, has been one of the few positive major markets in recent months, as they are benefitting from more political and economic certainty. What a difference a year makes. The U.S. has been moving sideways as the rise of the technology giants - the so called FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) – has currently levelled off, and Emerging/Far Eastern markets have seen renewed investor interest. We have maintained our more cautious holdings in bond funds and alternatives as these provide the defensive support for portfolios if indeed this calm is followed by the storms.