Monthly market commentary

Transcription

1 Contents Monthly market commentary October 214 Equities 2 Credit 3 Nominal Yields 4 Inflation Real Yields 6 Asset Class Performance Summary 7 Comment 8 Contacts & Disclaimer 9

2 Equities: mixed performance Figure 1: Equity Market Returns (rebased at 1) Equity Markets Index Percentage Change 3/9/214 1 Week 1 Month 1 Year S&P (TR) % -1.4% 19.7% FTSE All-Share (TR) % -2.8% 6.1% EuroStoxx (TR) 977.6% 1.8% 14.6% Topix (TR) % 4.% 13.3% S&P TR FTSE All-Share TR EuroStoxx TR Topix TR 1 Total returns in local currency Equity indices Equities had a mixed performance over the month. The S&P closed down 1.4% and the FTSE All-Share lost 2.8%. The Eurostoxx gained 1.8% and the Topix was up 4.%. For the year, equities are still performing well, albeit at a lower pace than this point of time last year. Equities: different outlooks shape equity performance US economic data gave an upbeat picture on its economy which grew by 4.6% on an annualised basis in the second quarter of this year, more than the initially expected 4.2%. However, the US stock markets seemed more concerned with the implications the economic recovery might have on monetary policy. Towards the end of the month, Wall Street suffered one of the worst days for this year. Quantitative easing will end in October and a strong economic recovery seems to make the interest rate increase early next year inevitable. This wind-down of extremely expansive monetary conditions and the new era of uncertainty it creates could to some extent explain the lack of enthusiasm in America s stock market in spite of its positive economic outlook. The victory of the unionist campaign in Scotland s referendum was well received by the markets as it removed a considerable amount of uncertainty that could have worried markets. As in the case for the US, macroeconomic data still suggest that there are no serious obstacles for the strong UK recovery to continue. Some of the weaker risk asset performance might be explained by the plunge in the Tesco share towards the end of the month. Even though Tesco is not one of the Indice s largest constituents, the two profit warnings and accounting irregularities might have affected investor sentiment. At the beginning of the month, the Eurostoxx seemed to trade on Mario Draghi s announcement of the ECB s first ABS and covered loans purchase programme. These gains were partly reversed towards the end of the month as uncertainty of the extent of the programme remain, given Germany s opposition in general. Furthermore, the ECB was committed to only buying senior tranches of asset backed securities which would have a more limited impact on lending than a purchase of mezzanine tranches. For the latter, however, government guarantees would be required which might again lead to political infighting between the Eurozone countries. Gains in the Topix can partly be attributed to investors gaining exposure to Japanese shares before the start of the dividend season. Japanese export earnings have benefited from the weak Yen and increased capital spending in the United States. Page 2 of 9

3 Credit: credit spreads widen for ratings below AA Figure 2: GBP Corporate Bond Spreads over Gilts by Rating (change over week/month/year) Credit Spreads (bps) Source: Bloomberg, Bank of America Merrill Lynch, Capita Figure 3: GBP Corporate Bond Spreads over Gilts by Rating (Historic) Premium over Gilts (+1 Yr Gilts Index) % Week Movements 1 Month Movements 1 Year Movements AAA AA A BBB Over 1 Year AAA Credit Spread Over 1 Year AA Credit Spread Over 1 Year A Credit Spread Over 1 Year BBB Credit Spread Credit Corporate bond spreads widened over the month for lower rated issues. The Bond King s retreat rattles one of the world s largest bond managers California-based Pimco, which is one of the world s largest fixed income managers suffered outflows this month after losing Bill Gross, its second key person loss this year after Mohammed El-Erian left the company earlier this year. The shares of its owner, the German insurer Allianz, fell more than 6% on the news but the company announced it has no plans to sell the company and that Bill Gross would be replaced. The news had far-reaching effects on fixed income markets and even Treasuries fell as markets are evaluating the effects this move might have on demand for fixed income assets in the short run, given Pimco s weight in the market. US Treasuries are the largest holding in the Total Return Fund, managed by Bill Gross at Pimco. Markets also seemed to question the future performance of Pimco itself, given Bill Gross s ability to call the bond market. As a logical consequence, shares in Janus Capital, the company which Bill Gross joined, rose by almost 3% on the news. Gross correctly predicted the bull run in bond markets when Paul Volcker started his crusade against inflation in the 198s. He also foresaw the rebound in Treasury markets this year, after the temporary fall in yields towards the end of 213. The end of unprecedented monetary easing in the United States and the United Kingdom might create more trading opportunities over the medium term due to the resulting volatility; bond funds with experienced active managers might benefit from these conditions. For this reason, Bill Gross s move has been well received by Janus shareholders, while Pimco will be going through a period of uncertainty. Source: Bloomberg, Bank of America Merrill Lynch, Capita Page 3 of 9

4 Nominal Yields: Gilt yields rise slightly for all maturities Figure 4: Nominal Term Structure of Gilts Redemption Yield % Gilt Curve 3-Sep Gilt Curve 31-Aug Nominal Gilt yields Over September the nominal Gilt curve increased for all maturities. Potential effects of the Scotland referendum The outcome of the referendum removed the looming uncertainty over Britain s future. As a consequence, investors seemed to have shifted back into riskier assets at the expense of Gilts. Also, the end of this independence issue might have removed the last obstacle for the Bank of England to raise interest rates at the beginning of next year which is also being priced into the Gilt market. Change (bps) Gilt Change m/m Maturity (Years) Nominal Gilt Rates Maturity Points (yrs) Current % Week Change (bps) Month Change (bps) Year Change (bps) Page 4 of 9

5 Inflation: UK inflation falls slightly to 1.% Figure : Gilt Breakeven Inflation 2 Figure 6: CPI in the UK, US and Eurozone Breakeven Inflation % Gilt Breakeven 3-Sep - 14 Gilt Breakeven 31-Aug Change y/yin % UK (CPI) Eurozone ( CPI) UK (RPI) US (CPI) Change (bps) Gilt Breakeven Inflation Breakeven inflation Change m/m Maturity Points (yrs) Current % Week Change (bps) Month Change (bps) Year Change (bps) Inflation falls to 1.% The rate of the Consumer Prices Index (CPI) inflation grew by 1.% in the year to August 214 (down from 1.6% the month before) according to the Office for National Statistics. The largest downward contributors were motor fuels and food & non-alcoholic drinks, partly offset by upwards pressure on clothing, transport services and alcohol. 2 Gilt break even inflation has been calculated as the difference between nominal Gilt yields and Gilt real yields. Page of 9

6 Real Yields: real yields rise for all maturities Figure 7: Gilt Real Yield 3 Term Structure Real Redemption Yield % Gilt Real Yield 31-Aug Gilt Real Yield 3-Sep-14 Figure 8: 1-year and 3-year Real Yields Yield Gilt Real Yield - 1-year Gilt Real Yield - 3-year Change (bps) 1 1 Gilt Change m/m Gilt Real Yields Over September, real yields rose for all maturities. Real yields remained in negative territory across all maturities in September. Gilt Real Yield Maturity Points (yrs) Current % Week Change (bps) Month Change (bps) Year Change (bps) Gilt real yield has been calculated as the yield on index-linked Gilts Page 6 of 9

7 Asset Class Performance Summary Asset Class 1 Month Return 1 Year Return FTSE All-Share TR -2.8% 6.1% S&P TR -1.4% 19.7% Eurostoxx TR 1.8% 14.6% Topix TR 4.% 13.3% FTSE AW Emerging Market Index TR -4.8% 6.7% FTSE A Gilt +1 Yrs -1.% 11.4% iboxx Non-Gilt 1+ TR -.9% 1.8% FTSE A ILG + Yrs -1.% 9.9% IPD Property 1.4% 19.1% 1 Month LIBOR.%.% Asset Class Performance Summary The charts below and the table on the left show the one month and one year performance of various asset classes to the end of September Month Return 1 Year Return FTSE All-Share TR S&P TR Eurostoxx TR Topix TR FTSE AW Emerging Market Index TR FTSE A Gilt +1 Yrs iboxx Non-Gilt 1+ TR FTSE A ILG + Yrs IPD Property 1 Month LIBOR FTSE All-Share TR S&P TR Eurostoxx TR Topix TR FTSE AW Emerging Market Index TR FTSE A Gilt +1 Yrs iboxx Non-Gilt 1+ TR FTSE A ILG + Yrs IPD Property 1 Month LIBOR -6% -4% -2% % 2% 4% % 1% 2% Page 7 of 9

8 The Scottish Referendum The End is Just the Start for UK Devolution As the clock ticked past 4am on 19th September 214, a majority No vote coming in from the Fife area of Scotland meant, for now at least, the end to Scottish nationalists dreams of an independent Scotland. The final result was % in favour of retaining the Union, with a turnout of 84.6% - a figure not seen since 191, a time before women and a majority of men were allowed to vote. The following day Alex Salmond, leader of the Yes campaign, announced he would shortly be stepping down as First Minister for Scotland. Over stewardship of the Scottish National Party, Mr Salmond divided opinion both north and south of the border, but there can be no doubt about his significant impact on both Scottish and British politics. Although the voting is now over, the political matters are not done. As part of the campaigning to retain the Union, the three main UK political party leaders David Cameron, Nick Clegg and Ed Miliband made a pledge to Scottish voters to devolve more powers in the event of a No vote. On his address to the nation in the early morning of 19 September, David Cameron stated the following on the issue of further devolution of powers to Scotland: So now it is time for our United Kingdom to come together, and to move forward. A vital part of that will be a balanced settlement fair to people in Scotland and importantly to everyone in England, Wales and Northern Ireland as well. This statement seemingly re-iterated the Prime Minister s pledge to devolve additional powers to Scotland, but he also included a possible twist not previously anticipated; additional devolution for all countries within the United Kingdom, and went on to add: The question of English votes for English laws the so-called West Lothian question requires a decisive answer. So, just as Scotland will vote separately in the Scottish Parliament on their issues of tax, spending and welfare so too England, as well as Wales and Northern Ireland, should be able to vote on these issues and all this must take place in tandem with, and at the same pace as, the settlement for Scotland. In this context, the West Lothian question refers to whether MPs from Scotland, Wales and Northern Ireland should be able to vote on matters that affect only England in the House of Commons. The term was coined in 1977 after Tam Dalyell, Labour MP for the Scottish constituency of West Lothian, raised the matter repeatedly in a House of Commons debate on Scottish and Welsh devolution. David Cameron, in his post-independence speech, has once again raised the West Lothian question where only English MPs would be allowed to vote on English-only matters, in the same way that only Scottish or Welsh MPs can currently vote on matters affecting only Scotland or Wales. In voting No in the Scottish referendum, the Scottish people may, it seems, have not only put the wheels in motion for constitutional change in their own country, but also possible wide reaching constitutional change for the whole of the UK. Page 8 of 9

9 Contacts & Disclaimer Bobby Riddaway Head of Investment Consulting t e bobby.riddaway@capita.co.uk Albert Küller Chief Economist t e albert.kuller@capita.co.uk In preparing this report we have relied upon data supplied by third parties. Although reasonable care has been taken to gauge the reliability of this data, this report therefore carries no guarantee of accuracy or completeness, and Capita Employee Benefits ( Capita ) cannot be held accountable for the misrepresentation of data by third parties involved. The report is for your private information and is for discussion purposes only. This report is based on data/information available to Capita at the date of the report and takes no account of subsequent developments after that date. It may not be modified or provided by the Recipients to any other party without Capita s prior written permission. It may also not be disclosed by the Recipients to any other party without Capita s prior written permission except as may be required by law. In the absence of our express written agreement to the contrary, Capita accepts no responsibility for any consequences arising from any third party relying on this report or the opinions expressed therein. This report is not intended by Capita to form a basis of any decision by a third party to do or omit to do anything. CapitaEmployeeBenefits CapitaEB Capita Employee Benefits Employee benefits C Capita Employee Benefits is a trading name of Capita Employee Benefits Limited and Capita Employee Benefits (Consulting) Limited. Part of Capita plc. Capita Employee Benefits Limited and Capita Employee Benefits (Consulting) Limited are registered in England & Wales No: and respectively. Registered Office: 17 Rochester Row, Westminster, London, SW1P 1QT. Separately authorised and regulated by the Financial Conduct Authority. Page 9 of 9