Market Outlook

What happened over the quarter?

Read what we expect to happen in the next quarter >

Market Performance

Market Performance Q2 2016

For comparison purposes, over the same period the FTSE All Share returned 4.7%


Past performance is not a reliable indicator of future results.
Source: Morningstar Direct as at 30 June 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 35.5%


Past performance is not a reliable indicator of future results
Source: Morningstar Direct as at 30 June 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 4.3%


Past performance is not a reliable indicator of future results
Source: Morningstar Direct as at 30 June 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

Politics will be the key focus for the rest of the year with the US elections in November and uncertainty about how the UK will interact with Europe and the rest of the world as we move towards a Brexit. However, it is easy to fall into the trap of focusing only on the negatives. No doubt there will be challenges ahead, the first being keeping the UK and European economies buoyant, but also there are opportunities to look out for.

The opportunities

Income

Brexit has caused a global flight to safety, government bonds have been bought along with gold and the US Dollar. Corporate bonds, high yield bonds and emerging market bonds have become cheaper and are yielding at attractive levels, in aggregate above 5%. UK domestically focused companies, in particular banks, retailers and housebuilders, have been hit hard by negative sentiment and the yield on the UK stock market has risen to attractive levels. Even if you think some companies may have to reduce their dividends, income funds are generally more attractively priced than they were prior to the Brexit vote.

Preservation

There are funds which aim to produce positive returns no matter what is happening in markets. Our view is to expect modest returns from developed markets and therefore these funds offer stability and diversity to portfolios.

Disruption and sustainability

Brexit may have shaken nerves but it hasn’t shaken the clever entrepreneurial spirit of disruptive companies leading the charge in their sectors to become more efficient and make more exciting new products. We talk about sustainability in this Investment Outlook and around the globe there are exciting companies combining working to make the world a better place with being hungry for profit.

Asia and emerging markets

China was a key source of concern at the beginning of the year, but since then the economy and currency has settled down. Lower growth expectations for China and other emerging markets have now been factored in but they are still growing faster than developed markets; even the oil dependant countries are recovering – and they are largely immune to Brexit.

The US

The country is growing, and employment levels are strong as is the consumer. Overall, companies may have peaked in terms of earnings but there is a huge divergence in company fortunes. Cheap companies with steady earnings have not fared as well as the fast growing tech stocks. We are seeing a sea change as investors become more cautious ahead of the Presidential election and favouring the cheaper, previously unloved stocks. The jury is out on the direction of interest rates, with the market expecting an interest rate hike early in 2017.

The challenges

The UK

Many economists are expecting GDP growth to slow and for business confidence to fall to levels that may stall the country and take it into recession. We believe these fears are overdone. The very short term looks grim but the Government and the Bank of England are poised to provide stimulus to make the UK buoyant for consumers and businesses while attracting external investors. Weak sterling is helpful in attracting inward investment and once the dust settles companies which export to Europe will realise they have access to this market for the next two or three years on the current terms. If they want to remain leading edge in what they do they need to continue to invest in themselves.

London and the City

London is currently the gateway to Europe and to the world. It is English speaking, employs highly skilled people and has strong financial infrastructure. The major US banks have confirmed they are staying, but there is still considerable uncertainty for the financial institutions and the London property market looks wobbly for the time being. Some stocks have been hit hard, so picking through the wreckage presents an opportunity.

Europe

Ahead of the Brexit vote we were seeing unemployment reducing and sentiment indicators improving. These markets suffered more than the UK markets did after Brexit because in many ways they have more to lose. People are unsettled and more countries are now questioning the validity of the EU. The currency is stronger, which is hurting countries like Spain, Portugal and Italy. The Italian banks are in strife so this area isn’t offering any opportunities.

Japan

While its currency continues to hit new highs its equity market is going to struggle. Abenomics has failed to deliver, and, although deflation has disappeared, growth hasn’t risen as expected. We still see corporate Japan improving its governance and shareholder value but the macro background is a headwind.

Government bonds and negative yields

The trend globally for interest rates to be lower for longer is troubling. Over 74% of global government bonds are trading with yields below 1%. 10-year bond yields in Germany and Japan are negative which means investors are paying the governments for the privilege of investing in these bonds – described by some as “return free risk”. There is mounting concern that low interest rates and quantitative easing are no longer having a stimulating effect. We can’t predict how long interest rates will stay low but we do not see any value in long-term investments in Government bonds or cash.

Themes: 2016 and Beyond

Overall it pays to be brave and stay invested. As Martin Wolf wrote in the FT in January, the world economy has grown every year since 1946, even in 2009 at the height of the financial crisis. Innovations have been at the heart of this growth and there is no reason to foresee innovation running out of steam. We continually highlight opportunities to invest in these themes in our investment reviews and comments, which can be found on our News and Views pages.

Disruption

Newer, more forward thinking companies are challenging the big, established players across a range of industries. They are shaking up their relevant market sectors by adopting different, innovative business models and making use of leading edge technologies. Industrial jobs and processes are being impacted by technologies like automation, artificial intelligence, nanotechnology and the Internet of Things.

Sustainability

Sustainable investors typically look for innovative, growing companies delivering products or services which are helping to make the world a better place. Evidence shows those companies which adopt sustainable business practices are doing better than those which do not.

Income

Income is increasingly important as we are all living longer and likely to spend more years in retirement. Companies in the UK have a long and established track record of growing sustainable dividends streams. There are also opportunities across the globe, with the Asia and emerging markets income stories looking interesting. Other income sources are infrastructure, property and high yield bonds.

Preservation

One of the key aims for most investors is preserving their capital – put simply, not losing any of their money. Absolute return funds can be a useful addition to portfolios as a useful diversifier.

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