the tortoise & the hare Q 3 2018 Economic Overview The FED delivered its anticipated rate hike last week, its eighth since December 2015, raising rates to 2.25%. It happened on the back of confirmed US GDP growth of 4.2% for Q2, the highest growth rate in four years, with inflation hovering just above the 2% central bank target. In comparison, the UK experienced just 0.4% growth in the same quarter, while inflation rose to 2.7%. The Bank of England increased the bank rate to 0.75% in early August. Brexit negotiations have scarcely moved, leaving only a few more months to avoid a hard Brexit, with no full access to either the single EU market or the customs union. The Dollar gained 1.2% against Sterling. In the Euro area itself, growth occurred at the same level as on the other side of the Channel. Inflation is slightly lower at 2.1%, but the ECB remains cautious, keeping its refinancing rate at zero. The Italian government recently caused some angst as it plans to spend more money and increase the deficit. The Euro closed the quarter losing 0.5% of its value versus the Dollar. The Japanese Yen continued its losing streak against the Dollar, down 2.5% for the quarter. The Bank of Japan kept its target for the 10-year bond yield at zero, and the short-term interest rate at -0.1%. The Japanese economy is expanding moderately at 1% annual GDP growth and inflation increased to 1.3%, which is relatively high for Japanese standards. 1 The Chinese economy grew 6.7%, just above the government s target for the year. It remains to be seen how trade tension with the US will develop and what impact it will have on growth. Fixed Income Government bonds in local currency terms lost 0.9% of their value in Q3. For US investors, this pain was compounded by the continued strength of the Dollar. Credit, on the other hand, had a good quarter, gaining 1.2% in US investment grade and 2.0% in global high yield. Within fixed income, hard currency emerging market bonds were the place to be given that the EMBI index climbed 2.3% over the period. Equities The US equity market lead global markets higher over the summer, as it reached new all-time highs despite a 20% share price slump of Facebook in the interim. The S&P 500 gained 7.7% while stocks in Europe, the UK and Emerging Markets closed near the values they had three months earlier. Global equities therefore ended the quarter up by just 4.7%. Value stocks did better than small cap equities across the globe. Only in Emerging Markets did value stocks outperform the broad market, gaining 3.4%. On the other hand, in the US, the Russell 1000 Value index increased 5.7% and the Russell 2000 index rose by 3.6%. Issue 16 October 2018
Q3 2018 Economic Overview Real Assets and Total Return Global REITs had a meagre return of 0.2% in Q3. The broad Bloomberg Commodity index lost 2.0%. While crude oil prices rose by 3.3%, gold lost some of its shine as prices retreated by 5.1%. Sources: Morningstar for index data, FT.com for foreign exchange and yield data, Yahoo Finance for VIX data, Trading Economics for economic data, all as of 30 September 2018 The Credit Suisse Managed Futures Liquid Index was almost flat throughout Q3. The SG Multi Alternative Risk Premia index lost 1.2% of its value. EUR and GBP hedged share classes continued to suffer from the negative interest rate differentials with the US. Our fixed income total return manager added some value in Q3, despite having had a difficult time in August. 2 Issue 16 October 2018
The magic of diversification Risk Warnings Past performance is not a reliable indicator of future results. The illustrations are in US Dollars unless otherwise stated. Currency fluctuations may increase or decrease the returns of any investment. There can be no guarantee or assurance that a client s portfolio will not incur a loss over any particular time period. Fees and charges do not apply in respect of any index, indices are unmanaged, do not incur interest fees and cannot be invested in directly. 3 Issue 16 October 2018
Q3 2018 Economic Overview * % of GDP 2018 estimate change on 1 year ago **Source: Economist (30th September 2018) Source: Trading Economics (30th September 2018) Source: FT.com (30th September 2018) Source: Trading Economics (30th September 2018) *Quarter % Change from 30/06/2018 to 30/09/2018 **YTD % Change from 31/12/2017 to 30/09/2018 Source: FT.com (30th September 2018) Source: Yahoo Finance (30th September 2018) 4 Issue 16 October 2018
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