Bad news – good news

6 October 2017

Did I state last week that September had been a good month for stock markets? Well, looking at the above table, one must assume I made a mistake. Let me set the record straight: It was a good month in global equity markets, just not from a £-Sterling perspective. As the UK’s currency recovered some of its previous losses against other major currencies, naturally investment assets valued in those currencies declined in value, even if they rose in local currency terms. The same is true for overseas earnings of UK domiciled multi nationals and, with them dominating the FTSE100, the UK market’s main representative index was down as well.

Last year, the experience was the opposite, as £-Sterling fell, investors’ overseas assets rose in GBP terms, even if they were treading water in local terms. Overall then, was September a good or bad month for investors? I would say it was good, unless you desperately wanted to withdraw cash from your investments.

Good, because the rise in global risk asset markets has been somewhat reassuring for investors. Capital markets are seemingly not overly worried about the central bank’s widely broadcast determination to gradually end the era of ultra-accommodative monetary policy. That tells us that, compared to the ‘Taper-Tantrum’ period of 2013 (the first time monetary policy tightening was even mentioned), market participants do not appear to view this a dead certain threat to further global economic expansion.

Those who now interject that it is £-Sterling returns that matter to them – after all, their future use of their investment savings will be in the UK – can relax; it’s just one week into the month of October and the currency has already lost most of its September gains. Hapless Theresa May’s PR disaster of a conference speech be thanked. Or, was it merely a stark reminder that, because of Brexit, the UK’s medium-term perspective of a uncertain economic future remains unchanged, regardless of whether Mark Carney’s Bank of England raises interest rates by a quarter percent next month?

Beyond this news, the rest of the week brought mostly calmer politics (Spain/Catalonia) and encouraging macro-economic numbers. Great to see the synchronised global uptrend to gain traction again in the US and Japan – too bad they are backward looking numbers. There are certain forward-looking indicators that construction around the world is slowing, as is consumer spending. This worries many – us included – given it was those two economic variables which have been crucial to the economic progress of the past years.

On the other hand, there is strong evidence that business confidence (just not in the UK) is growing stronger and business investment is finally returning – in some areas like Europe with such vengeance that it can easily compensate for softer consumer and construction demand. Should this continue, then the combination with tightening job markets should lead to wage improvements. That should stimulate at least consumer demand back to previous levels.

The stock market highs in the US, and other global markets in the past week, tell the same story, and so we will have to continue to manage currency exposures carefully across portfolios. For the moment, we are glad that we took the opportunity of closing our USD underweight position by selling some of our strengthened GBP holdings at the end of September.

For the full weekly, please click here.