Weekly Market Update: Weak Week for Sterling

Mon 30 Sep 2019

Market Update

Major developed market equities gained in Sterling terms this week, due in large part to currency effects. Many of these indices actually fell in local currency. UK equities grew by +1.1% led by utilities and healthcare sectors. US stocks were up +0.4% in Sterling terms but had fallen -1.0% in local currency, this result driven as Sterling fell -1.5% versus the Dollar. Sterling also fell relative to the Euro and the Yen, by -0.8% and -1.2% respectively. UK 10Y Gilts yields fell for the second consecutive week, from 0.63% to 0.50%. US 10Y Treasury yields also fell, to 1.68%. Globally, the best performing sectors were utilities and consumer staples as defensive stocks saw a second week of modest gains. In commodities, Gold rose +0.1% in US Dollar terms whilst oil fell -2.4%, to $55.8 a barrel. Oil prices had fallen sharply on Iranian claims of a possible lift on sanctions, before rising slightly after Trump tweeted to the contrary.

Chief Economist Analysis

Another week of acerbic politics and low yields has passed. Just this morning, our phone notifications lit up with news that Chinese manufacturing may have been finally, albeit marginally, expanding. In a world inundated with low  growth data, any inkling of good news is enough to make headlines. However, the larger picture remains unchanged (and so does our asset allocation). Not so much that visibility for investors is very low (the Brexit deadline is drawing closer and no resolution is at hand), but that the writing on the wall is something that we would rather not see: growth, yields and inflation are to remain low as the global economy looks more and more like Japan. From this vortex, not even China, the growth powerhouse of the last two decades, seems able to escape. So what should investors do? For one, they must actively look for growth where they can, but making sure they don’t overpay for it, or indeed pour IPO or high yield debt money to companies with no real prospects. Also, long term, it is good to shy away from chasing yields all the way to the bottom. The normal investing rules don’t apply to large parts of the fixed income space nowadays. Rather than a “safe haven” asset class, the sovereign bond market is turning into a high-stakes poker game of central bankers and bond traders. Anyone sitting at that table should better have a lot of capital and be prepared to take profits rather than wait for long term payouts.

•George Lagarias, Chief Economist