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Standard Life Investments - Q3 2016 Global Review

A summary of events that shaped the markets during the last quarter.

In Brief

  • Equity markets deliver positive returns
  • Monetary policy across the world remains supportive
  • The fallout from the UK’s referendum vote appears milder than expected
  • UK 10-year gilt yields hit a record low
  • The UK commercial real estate market steadies

Global Review

Global equity markets enjoyed a relatively strong third quarter, with all major indices up in local currency terms. Supporting sentiment was improving US economic data, accompanied by a US Federal Reserve that is erring on the side of caution with regards to rate increases. Monetary policy in the UK, Europe, Japan and China also remained supportive. Meanwhile, the fallout from the UK’s EU decision has been less severe in the short term than many feared, including for the UK economy. However, concerns about Europe’s banking sector snapped sharply back into focus after Germany’s Deutsche Bank ran into trouble. This came on the back of lingering concerns about Italy’s lenders.


Although the UK’s referendum on EU membership took place in June, the future path of events will remain unclear for some time to come. The country’s new Prime Minister, Theresa May, confirmed that ‘Article 50’ – the formal process for leaving the EU – will not be triggered until March 2017. Nevertheless, both consumers and UK companies have proven resilient. Meanwhile, the FTSE 100 continues to surge on the back of strong results of UK listed companies that have a large part of their operations overseas. Sterling’s three-decade-low has benefited companies that earn money abroad.


The US economy continued to improve over the third quarter. Non-farm payrolls averaged 200,000 per month, consumption – the engine of the economy – remained robust and consumer confidence was at its highest since the financial crisis. In addition, new homes sales and house prices were up. Despite this relatively positive backdrop, the US Federal Reserve chose to stay its hand and keep rates on hold. These two combined factors supported risk assets.


European stocks increased marginally over the quarter. Aside from the UK’s EU referendum, Europe is fraught with uncertainties. Spain’s political parties are yet to form a functioning majority government. In Italy, meanwhile, Prime Minister Matteo Renzi faces a challenge to his legitimacy. A referendum on constitutional reform in December is seen as a vote of confidence on Renzi. Politics are also starting to come into play in Germany ahead of next year’s presidential elections. Right wing parties have recently made gains, while Germans are also paying attention to Deutsche Bank’s credit woes.


Asia Pacific markets delivered robust returns over the three months to end-September 2016. Driving sentiment was better economic data from China, underpinned by continued easing from the country’s central bank. Measures to open financial markets to foreign investors were also well-received, while mainland issuers were given permission to directly invest in Hong Kong shares. This risk-on mode was reflected in the strong performance of Korean, India and most ASEAN markets, while Taiwan benefited from Apple’s better-than expected Q2 results. Markets, however, gave back some gains at the close on rising India/Pakistan tensions and concerns about the political climate in the Philippines.


The Bank of England announced both a rate cut (to 0.25%) and a new £60 billion quantitative easing programme. The 10- year gilt yield, which moves inversely to its price, fell to record lows before edging back up later in the quarter as UK economic signals proved healthier than anticipated. Elsewhere, expectations of further interest rate hikes in the US fell significantly in the aftermath of the UK vote. However, the risk re-emerged as US labour market numbers remained strong. This hampered the performance of US Treasuries, particularly short-dated bonds. European government bond yields were generally resilient over the quarter and were buoyed by a risk-off market tone in September. This stemmed from concerns about the German banking sector.


Corporate credit enjoyed a positive quarter; strong technical factors, including the European Central Bank’s Corporate Sector Purchase Programme and robust inflows into the asset class, were the primary driver of this. While the period started in the shadow of the surprise outcome of the UK’s EU referendum, the expectation of further central bank intervention meant investors remained relatively sanguine. Indeed, the announcement by the Bank for England that it would buy the sterling denominated bonds of what it deemed to be strategically important issuers was well-received.


The UK commercial real estate market is gradually returning to some normality following the surprise result in the EU referendum. While heightened uncertainty remains, recent economic data have been better than initially feared. For example, business activity surveys rebounded quickly, while the unemployment rate remained static. Within real estate, investment activity was subdued in the first couple of months after the referendum. Trading volumes in August were £1.6 billion, compared with £4.4 billion in August 2015. However, market conditions then appeared to stabilise, with volumes rising to £2 billion in the first half of September according to preliminary data.



November 2016

Please note that these are the views of Standard Life Investments and should not be interpreted as the views of RL360°.

Author

Standard Life Investments

November 2016

Please note that these are the views of Standard Life Investments and should not be interpreted as the views of RL360°.

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