- During September, the US Federal Reserve (Fed) joined the Bank of Canada, the European Central Bank and the Bank of England, in beginning to cut interest rates. In the States, they did so with a bumper cut of 0.5%. Think of this as a buy one, get one free policy decision and recognition that they were too slow to begin the process of cutting rates, in the face of a jobs market that turned out weaker than previously forecast.
- Within central banks there has been an important shift. For the last few years, the focus of central banks, not just in the US, has been to curtail inflation. Inflation is no longer the chief concern. Jobs are. The Fed has a dual mandate, to keep inflation at target and to maintain full employment and whilst other central banks may not have the same formality, they all recognise the need to support the jobs market in a weakening point of the growth cycle. With the inflation battle under control, the fight to save the jobs market and the economic recovery is now firmly on.
- The global economic outlook looks more resilient than anticipated some quarters ago, but we are in a period of slowing economic growth and the health of the jobs market remains key to determining whether a ‘soft-landing’ (bringing down inflation, without destroying economic growth) or a weak recession ensues. China remains weak as it continues to struggle resurrecting consumer demand and issues in its property sector remain. Recovery will be a long haul, despite a recent stock market bounce.
- Fixed income yields have rallied strongly in recent months. Solely from a yield perspective, fixed income is less attractive today than it has been, but yields are still at a level to warrant attention, particularly as the interest levels on cash begin to weaken. Corporate credit spreads (the extra yield over government bonds) look firmly valued too. The backdrop from central banks is now supportive, hence we expect solid returns over cash from the asset class and use a selection of investment grade corporate and strategic bond funds, having added to government bonds earlier in the year.
- There are some highly cash generative companies in areas such as mega-cap US equities, but they also trade at a rich premium. Whilst equity markets remain more sensitive to an economic slowdown, valuations differences abound. In developed markets, the US trades at a premium versus most, whereas the UK looks cheap. In emerging markets, China looks troubled but cheap, whilst India & Taiwan look expensive.
- The Japanese yen surged in July and early August, as the Bank of Japan raised rates and triggered a market shock. The euro is slightly down versus sterling year to date, so too is the US dollar which anticipated, and then reacted, to a Fed cut at the higher end of expectations.
- It has been a good year for gold bugs, the yellow metal hit $2,500 in August, having started the year around $2,000 and finished September over $2,600/oz. The value of gold has risen strongly since March, helped by a weakening dollar and the recognition we are on the downward leg of Fed monetary policy. Brent Crude prices weakened in the face of slowing economic growth and the risk of surplus supply emerging if OPEC presses ahead with bringing back more production next year. Brent crude finished September just over $70/barrel.
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