Following the US presidential election, and with an eye on upcoming events in Italy, France and the Netherlands, equities have effectively treaded water over the last three month. The influential US market broke out of its long-term trading range on the upside in July and has held onto this position. Equities remain attractively valued on a relative basis compared to bonds and cash. Although bonds have been supported by the tailwind of aggressive ECB monetary policy action, they offer little long-term value and have recently come under some pressure.
Equities rose slightly in October as market participants awaited the US presidential election result and the likely US rate rise in December. There was further sector rotation out of 'bond-proxies' and the US Q3 earnings' results season was a positive for the market.
World equities rose by 0.8% during October and have given a total return of 4.1% in the first 10 months of the year. It should be remembered that the world market had fallen by almost 15% in the first six weeks of the year. There was a mixed bag of returns amongst the major equity markets in local currency terms in October ranging from plus 5.3% in Japan to minus 2.2% in Australia. Year-to-date, the strongest equity markets in local currency terms have been the UK (+11.4%) and Hong Kong (+4.7%). As regards the UK, significant sterling weakness has resulted in the euro return for the FTSE100 Index falling back to minus 8.4%.
As mentioned, there was sector rotation in October from 'bond-proxies' into some cyclical stocks. In the US, telecoms fell by 7.5% whilst financials rose by 2.2%. Cyclical stocks have clearly outperformed defensive areas in the US so far in 2016 with energy (+13.2%) being the best performing sector; real estate (-4.2%) the worst.
Bonds and interest rates
The Merrill Lynch Euro over Five Year Index fell by a hefty 3.2% in October although it remains up 6.5% year-to-date. Eurozone bonds had been supported up to the end of July by economic growth concerns and increased quantitative easing. However, they are now facing an environment of higher US rates and the prospect of expansionist US economic policy. There was little difference between peripheral and core eurozone markets during the month, albeit core markets have been stronger so far this year with Italy, in particular, underperforming.
The German 10-year bond yield rose over the month from minus 0.12% to plus 0.16%. The yield hit an all-time low of minus 0.19% on July 8th. Equivalent US rates rose sharply from 1.59% to 1.83%.
There is now a 90% chance that the Fed will raise US interest rates again in December 2016. The first rate rise in many years took place last December. Eurozone rates are likely to remain at current ultra-low levels for the foreseeable future.
Commodities and currencies
Commodity prices overall were flat in October and remain up by 5.8% so far during this volatile year. The oil price was marginally weaker, falling from $48 to $47 per barrel; the price had been up strongly the previous month, reacting to the first proposed oil output cut by OPEC in eight years. The gold price fell by 3% in October to $1,273 per troy ounce. Gold is now up by just over 21% from its five year low of $1,049 in mid-December 2015. The euro currency weakened by 2.5% against the US dollar during the month with the EUR/ USD rate moving from 1.123 to 1.096.
This Monthly Investment Review does not constitute an offer and should not be taken as a recommendation from Zurich Life. Advice should always be sought from an appropriately qualified professional.