Paul Glover’s market review
NFU Mutual’s chief investment manager Paul Glover has 30 years of professional experience in investments. Here he gives his views on how the investment markets have performed in the third quarter of 2016.
Markets are still working through the likely implications of the Brexit vote, but so far the UK economy has weathered the uncertainty relatively well. The main Brexit impact to date has been on the currency and this has had a significant impact on market returns.
Whilst lower UK economic growth forecasts, rising inflation and uncertainty over future trading relationships are not market friendly developments, benefits from the fall in sterling for UK exporters and companies with overseas earnings helped UK equities achieve solid gains over the third quarter.
International markets have been more focused on central bank activity and forthcoming elections, but aided by currency moves good gains were seen from global equities. Bank of England moves to counteract post-Brexit economic weakness helped bond markets achieve further gains, but commercial property values declined over the quarter.
UK equities gained 7.8% in the third quarter, taking 9 month returns to 12.4%. With the economy having held up better than many feared so far, there was a good recovery from many of the more domestically exposed stocks that had fallen heavily in the immediate aftermath of the EU referendum.
The large drop in sterling has significantly boosted overseas asset returns in 2016, with third quarter international equity gains of 8.4% leaving 9 month returns at 21.8%. All regions saw positive returns, with Japan leading the way in the quarter whilst emerging markets continued to perform well and were showing 2016 gains of over 30%.
The lower for longer interest rate environment and resumption of quantitative easing helped bonds make further progress, with quarterly gains of 5.6% for corporate bonds and 2.3% for gilts which took 9 month returns to around 14% for both.
The commercial property market endured a more difficult quarter, with liquidity issues in many of the leading property funds and downward valuation adjustments resulting in an estimated quarterly loss of around 3%. The August cut in the interest rate to 0.25% ensured returns from cash deposits remained very low.