The strong recovery in stock markets gained further momentum in
the third quarter fuelled by better-than-expected corporate
earnings, a raft of improving economic indicators across the globe
and an increased appetite from investors to hold ‘risk’ assets,
rather than sit in near zero-yielding cash deposits. Global
equities, measured by the MSCI World Index, rose by just under 17%
during the quarter. The FTSE 100 returned 21%, making it the best
performing quarter for UK ‘blue chip’ companies since the index
began in 1984. Further afield, there were spectacular performances,
once again, by the Brazilian, Russian and Indian bourses, with each
delivering returns of 26.7%, 27.1% and 18.2% during the three
months ending September. Robust returns were not limited to equity
markets and investors have captured uplifts whether they have
allocated capital to government bonds, corporate bonds,
commodities, hedge funds or property. The heady cocktail of
extraordinary liquidity coupled with a co-ordinated commitment from
policy-makers to maintain this accommodative stance has been the
catalyst for one of the most powerful rallies in risk assets in
recent market history.
Many of the trends that were developing in the second quarter
have continued to hold true over this last reporting period. Growth
forecasts have been upgraded for the second half of the year and
the prospects for 2010 have improved markedly as a degree of
economic visibility has emerged. Household savings rates across the
Western economies have risen as consumers and banks deleverage, and
this has supported the view that global imbalances will, albeit
slowly, reverse. The emerging world consumer is growing in economic
importance and investors are fast recognising the opportunity that
well-placed international consumer goods’ producers, healthcare and
IT companies now find themselves in. It seems even the
much-maligned car industry has a chance to survive when auto sales
in China are up 90% year-on-year to the end of August!
This mood of a return to global economic prosperity permeating
capital markets owes much to the actions taken by governments and
their officials since the collapse of Lehman Brothers in September
2008. Proactive fiscal policy and loose monetary policy have
stabilised both developed and developing economies, and innovative
measures to stimulate household and corporate demand have
undoubtedly fostered rising confidence. Recent remarks from the
managing director of the International Monetary Fund (IMF) urging
policy makers to ‘err on the side of caution as they decide to exit
their crisis response policies’ highlights the desire to ensure the
economic progress made to date is not put at risk by premature
policy action. Indeed, for many, preparing for the consequences of
future government responses is now more important than the
financial crisis itself. As wealth managers, we share this view and
see it as perhaps the biggest influence on the direction and
sustainability of any economic recovery.
Our last quarterly report referred to the bar-bell approach we
had introduced to portfolio construction – a process that purposely
overweights allocations to assets at the low-risk end of the risk
spectrum and, in turn, allows us to make smaller, targeted
allocations to high-risk assets. We have maintained this
approach through the quarter, content that our tactical asset
allocations made in the early summer would capture gains for our
clients, but secure in the knowledge any sudden deterioration in
sentiment or negative news flow would not unduly hurt portfolio
valuations. In terms of high-risk assets, the capital we
committed to Greater China, India, Hong Kong, Australia, South
Korea and Singapore either directly, or via our pan-Asia funds, has
delivered attractive returns as all these markets have risen
between 10% and 25% over the quarter.
At the lower-risk end of the spectrum, investment grade
corporate bonds have continued to benefit from the huge inflows of
investor capital, with the UK corporate bond market posting its
sixth consecutive month of positive returns in September. Given the
reluctance of banks to lend, the corporate sector has been able to
‘tap’ this demand from investors and a flood of new issuance has
characterised the quarter. This opportunity to bypass the banking
sector is likely to continue and the ease with which companies have
been able to refinance via the capital markets has been a
significant contributor to restoring confidence across all asset
classes.
Despite the headlines supporting the rise in developed nation’s
equity markets, we have retained the view markets are discounting
too-robust a recovery and the sectoral shift to cyclical stocks has
left some of the un-loved sectors, such as utilities, undervalued
and therefore cheap. Towards the end of this quarter we have been
ensuring all portfolios have allocations to both water and
power-generating utilities. The benefits of this are two-fold;
firstly these companies tend to support healthy dividend flows
which are attractive in this low-yielding environment and secondly,
the revenues of a number of utility companies rise in line with
inflation due to price regulation controls. The timeline for any
inflationary pulse, at present, seems quite lengthy although this
asset allocation helps to part hedge portfolios to this risk ahead
of the
curve.