Market Outlook

What happened over the quarter?

Read what we expect to happen in the next quarter >

Market Performance

Market Performance Q3 2016

For comparison purposes, over the same period the FTSE All Share returned 7.8%


Past performance is not a reliable indicator of future results.
Source: Morningstar Direct as at 30 September 2016.
Indices used: FTSE All World Ex UK TR GBP, FTSE AllSh TR GBP, S&P 500 TR USD, FTSE Europe All Cap Ex UK TR USD, MSCI EM IMI GR USD, Topix TR JPY, MSCI AC Asia Pac Ex JPN GR USD, MSCI Sector indices, Barclays Global Agg Float Adj TR Hdg GBP, FTSE Gilts All Stocks TR GBP, Barclays Gbl Infl Linked UK TR GBP, JBM GBI US Traded TR USD, JPM GBI Global European TR EUR, BofAML Global HY Hdg GBP, FTSE EPRA/NAREIT Developed TR GBP, Oil Price Brent Crude PR, Gold London AM Fixing PR USD.

Market Performance Performance over five years

For comparison purposes, over the same period the FTSE All Share returned 68.9%


Past performance is not a reliable indicator of future results
Source: Morningstar Direct as at 30 September 2016.
Indices used: FTSE All World Ex UK TR GBP, FTSE AllSh TR GBP, S&P 500 TR USD, FTSE Europe All Cap Ex UK TR USD, MSCI EM IMI GR USD, Topix TR JPY, MSCI AC Asia Pac Ex JPN GR USD, MSCI Sector indices, Barclays Global Agg Float Adj TR Hdg GBP, FTSE Gilts All Stocks TR GBP, Barclays Gbl Infl Linked UK TR GBP, JBM GBI US Traded TR USD, JPM GBI Global European TR EUR, BofAML Global HY Hdg GBP, FTSE EPRA/NAREIT Developed TR GBP, Oil Price Brent Crude PR, Gold London AM Fixing PR USD.

Market Performance Performance YTD

For comparison purposes, over the same period the FTSE All Share returned 12.4%


Past performance is not a reliable indicator of future results
Source: Morningstar Direct as at 30 September 2016.
Indices used: FTSE All World Ex UK TR GBP, FTSE AllSh TR GBP, S&P 500 TR USD, FTSE Europe All Cap Ex UK TR USD, MSCI EM IMI GR USD, Topix TR JPY, MSCI AC Asia Pac Ex JPN GR USD, MSCI Sector indices, Barclays Global Agg Float Adj TR Hdg GBP, FTSE Gilts All Stocks TR GBP, Barclays Gbl Infl Linked UK TR GBP, JBM GBI US Traded TR USD, JPM GBI Global European TR EUR, BofAML Global HY Hdg GBP, FTSE EPRA/NAREIT Developed TR GBP, Oil Price Brent Crude PR, Gold London AM Fixing PR USD.

Outlook on the next quarter

Economically the world is in good shape. On the whole it is growing, although admittedly more slowly than expected. This slow, steady trend seems set to continue, with little threat of recession. Markets have been disaster free for some time – even the recent Deutsche Bank scare has been averted – and we are in the third longest bull market recorded. While economies may be predicted to continue steady as she goes, at the same time there is change afoot in the global political arena. This is because people are becoming restless for change; all over the world we are seeing people struggling with their identity as cultures merge and it appears globalisation has its limits.

In the UK people voted for Brexit because they wanted sovereignty, and to govern themselves again. The new government has reacted by listening and promising change. Mrs May’s closing speech at October’s Conservative Party conference confirmed that Brexit will occur, and she set out a timetable while appealing to the middle ground. Markets like that sort of certainty. So what do we have to look forward to?

The opportunities

Disruption and change in the UK

Not all change is bad. Apple demonstrates this well: any change it makes to the iPhone is well received because the company is always thinking about how users will benefit. The UK has been the fastest growing economy in the developed world, and employment is at a record low, but with Brexit on the horizon things will change.

  1. Economic growth is expected to remain steady because it’s business as usual for the next three years. After article 50 is triggered in March 2017 trading with Europe will continue as is. The good news is that the government is determined to work with Europe as a “friend” and is positioning the negotiations as a fresh opportunity to improve our working relationship.
  2. The weakness of the pound, now at a 31 year low versus the US dollar, down 12% year-to-date, and down 15% versus the euro, will continue to help exporters. The UK has become the second most popular country (after the US) for foreign investment and mergers and acquisitions activity. UK companies are cheaper, with the weak currency together with a bit of Brexit concern discounting their value. Sterling is below its optimal value but could still be vulnerable going forward.
  3. Fiscal vs monetary policy. One of the most welcoming comments in Mrs May’s closing speech was the mention that “change has got to come to monetary policy”. The country no longer needs emergency medicine and she acknowledged the harmful side effects of lower rates for savers. Following on from this it is unlikely that the Bank of England (BoE) will lower interest rates further and we should be looking forward to a stimulative Autumn Statement.

Asia and emerging markets

This Investment Outlook provides an in depth review of this sector. Despite the recent strong inflows into these asset classes, these regions remain strong diversifiers for your portfolio. Interestingly, no other region in the world has as many companies yielding above 2% as emerging markets.

Europe

Mixed messages are coming out of Europe, and the stock market has failed to make headway this year. A negative outlook for banks weighs on their share prices, partly due to concerns on Deutsche Bank’s ills, but mainly due to the low and negative interest rate world hurting profitability. On the positive side we are seeing improved growth in manufacturing and renewed consumer spending, which could see Europe pulling through from the worst.

Equities

We favour equities over bonds. In the search for income, higher yielding bonds have been snapped up and they are no longer cheap and are vulnerable to a rising interest rate environment. Within government bonds near zero yields have little attraction. Admittedly, equity valuations for strong, stable growth companies in the consumer and technology sectors are looking expensive with long term prospects priced in. However cheaper, lower growth companies have been left behind and remain attractive.

The challenges

Brexit

While it will be business as usual, going forward there are still question marks about how we will trade with Europe. Companies such as Nissan, with its car manufacturing plant in Sunderland, are holding out on expansion plans until there is more clarity. The City also is questioning how to move forward. The weak pound is challenging for domestic companies which source their raw materials abroad; with stiff competition there is no room to raise prices.

US Election

The polls, if we are to believe them, are pointing to a Clinton victory but the run up to the US Presidential Election may cause some turbulence in markets. However the US consumer, the backbone of its economy, is in robust shape. Consumer confidence recently hit a nine-year high and jobless claims are at record lows. Growth, though, is forecast to slow from 2.6% in 2015 to 1.6% in 2016 according to IMF figures. It’s difficult to predict any outcome here and we, with you, will watch for the outcome with bated breath. It’s fair to say that even if there is a Trump victory, his power and rhetoric is expected to be reined in by the political system but he is still a wild card. The US remains one of the drivers of global growth and as such can be a good place to diversify your portfolio. The economic backdrop is still positive for US companies, though if Trump is elected it may give raise to worries for international trading companies around the world because he talks about protecting US business. A Clinton win, on the other hand, has already been factored in by the healthcare sector which is expecting margin pressure on its medicines.

Oil

The oil price has been on a rollercoaster ride this year. Back in February the price fell to $28 a barrel but its price has been seesawing upwards to close the quarter at around $50 a barrel. The industry widely agrees that $65-75 a barrel is needed for oil companies to break even, so the price needs to be higher. However for UK consumers of oil the price hike, together with the hike in the dollar, will have an adverse knock on effect to their spending power. Domestic companies are under both pricing and margin pressure.

Japan

Despite the Bank of Japan announcing more changes to extend its long running stimulus programme, already by far the largest in the world as a percentage of GDP, the stock market has gone nowhere over the past year. Foreign investors have benefited from the strong yen, but it’s a market to be wary of for the time being.

Interest rates and Inflation

Being the biggest and most influential country in the world, the actions of the US Federal Reserve (Fed) are centre stage right now. Fed chair Janet Yellen has indicated interest rates are likely to rise and if and when that happens markets may react negatively. The tone of the message will be important. If markets believe the next rise is part of an orderly plan to reduce central bank involvement in running the economy then the response will be more muted.

Inflation has been absent for a while in most developed countries, including the UK, despite the huge amounts of quantitative easing. However input prices such as food, oil and other commodities are starting to tick up and a rising trend is now detectable. The trick will be to allow a healthy level of inflation to creep into the economy without it getting out of control.

Hold your nerve and maintain a balanced portfolio

As mentioned we are in the third longest bull market in history. People are right to be cautious, and the markets may wobble it a bit. As we know markets never go up (or down) in straight lines and as investors we must prepare ourselves to hold our nerve in these times. We advocate maintaining a balanced portfolio, ensuring it has a good spread of investment styles – growth and value – and is globally diversified. Depending how active you are you may wish to trim some of your profits. Don’t forget you can also make use of your annual ISA and capital gains tax allowance. Remember, tax treatments depend on individual circumstances and may be subject to change in future.

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Investors should be aware that the value of investments can fall as well as rise, you may get back less than you invested. If you are unsure about the suitability of a particular investment you should speak to a suitably qualified financial adviser.