Month ending 31 August 2017
A constructive month for equities and bonds, with GBP weakness flattering soft equity performance and a boost to bonds from geopolitical worries.
In GBP terms, Emerging Markets outperformed, gaining +4.46%, while UK equities were the laggards, delivering +1.43%.
In bonds, UK Gilts led the market, gaining +2.05% with European government bonds lagging, gaining +0.85%.
GBP weakened against all main currencies, falling -2.71% versus the Euro and -2.16% against a weakening US dollar.
Oil reversed the previous month’s rally, falling -5.86% and gold gained 3.49%.
Despite continued GBP weakness, UK inflation has remained more subdued at 2.6%, in part due to weaker inflationary impulses from oil prices. However, consumer confidence continues to be weak, likely due to lower purchasing power and negative news on house prices.
In the US, Q2 QoQ annualised GDP growth was revised up to 3% on strong consumption and fixed investment data. The Composite PMI and consumer confidence indicators both continued their rising trend, although employment and wage data were weaker than expected.
Eurozone GDP grew at 2.2% YoY in Q2, the fastest rate since 2015. In Europe, PMI data continues to show resilience, with a stronger EUR not yet weighing on exports. Consumer confidence remains close to record highs, while inflation accelerated modestly to 1.5%.
After a period of weaker nominal growth, Chinese PMI data points to strength in services and manufacturing sectors, while the GDP proxy indicator points to stronger activity ahead, although inflation has softened further to 1.4%.
Japanese Q2 GDP accelerated sharply to 2.1% YoY, although July’s CPI measure remained subdued at 0.4%. Private consumption and investment were key drivers of growth, and hiring has increased, yet wage growth remains scant, contributing to sluggish inflation.
Economic data continues to show strength, although inflationary pressures have reduced and current steady levels of growth do not appear to be exerting any upwards pressure on inflation. After a flurry of excitement around the possibility of central bank policy tightening, expectations of hawkish activity appear to have faded significantly. Coupled with a strong reporting season, this has supported risk assets, even against a challenging geopolitical backdrop.
We continue to remain slightly overweight the US and Europe, believing these regions still offer attractive potential earnings growth. Our asset allocation is positioned to benefit from the ongoing improvement in earnings given the recent uplift in global GDP.
At an asset class level, we now remain only marginally overweight in shares, having trimmed our risk exposure, and underweight in bonds. We maintain a small allocation to alternatives for diversification.