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LCP Investment Summary - September 2018

Posted on 1 October, 2018 by Administrator

LCP Investment Summary - September 2018

Global equities rose 0.8% (in € terms) during September.

Investors concentrated more on positive shorter-term issues like strong economic data (highlighted by the expected U.S. interest rate rise) and corporate earnings as the month progressed, and less on the potential longer-term issue of the evolving global trade war (despite President Trump announcing new tariffs on $200bn of Chinese imports). Eurozone equities fell sharply on the last day of the month as the Italian government announced its budget-deficit target for 2019, which will likely be in breach of EU rules on fiscal responsibility and may also lead to downgrades of Italy’s credit rating.

Bonds

Longer-dated Eurozone bond prices fell 1.6% in September, with the yield on the AAA Eurozone 15+ Year Index rising to 0.95% by month end. The Euro Broad Sovereign 10+ Year Index fell by 0.2% with its yield rising to 1.79%.

The German benchmark 10-year bond yield rose to a four-month high after ECB chief Mario Draghi announced a ‘vigorous’ pick-up in underlying inflation and also building wage pressures across the Eurozone area, but fell back somewhat at month-end as new inflation data showed a slight decrease in ‘core’ inflation (which doesn’t include fuel and food prices etc). Italian government bond yields also rose sharply after the announcement of the 2019 budget-deficit target.

Sample DB Scheme 

The funding level of our sample DB scheme rose to 99.0%, as its assets fell by less than its liabilities (calculated using a MFS proxy) over the month.

Sample DC Schemes

The sample Medium Risk and Pension Purchase Strategies both fell in September as a result of longer-dated Eurozone bond prices falling over the month.

Market Performance to 30th September 2018

Global equities rose 5.4% (in € terms) in Q3 ‘18, with investors reassured by both strong global economic data and corporate earnings. Concerns over the evolving global trade war surfaced at different times, with President Trump taking aim at China, Canada, Mexico and the EU on various trade issues. AAA-rated bond prices fell 1.2% (and yields rose) over concerns about higher inflation data, news of Japan’s monetary plans and also Greek & Italian debt levels.

Equity Performance

Global equity markets rose during July, with strong second quarter company earnings in both Europe and the U.S. reassuring investors following their concerns on the evolving global trade war during May and June. However Facebook and Netflix both fell sharply after releasing disappointing earnings reports. Investors were also reassured late in the month following the meeting between President Trump and EU Commission President Juncker which saw both sides agree not to impose further tariffs during ongoing negotiations, which was particularly good news for European car producers who export to the U.S.

North American equities had a strong month in August, boosted by upwards revision of Q2 GDP data and the strongest year-on-year growth in corporate profits in six years, helped by the new tax cuts. Investor concerns over the evolving global trade war abated for most of the month but resurfaced near month-end when President Trump announced an additional $200bn of tariffs on Chinese imports, threatened to withdraw from the World Trade Organisation (WTO), rejected the recent agreement with the EU on car imports and was also at loggerheads with Canada on the North American Free Trade Agreement (Nafta) after announcing ‘a beautiful, brand new US-Mexico trade deal’.

Eurozone equities fell over the month, with investors concentrating more on issues like the growing trade war, the currency drama in Turkey and its possible contagion effect, and also the Italian government’s high debt levels.  

During September, investors seemed to concentrate more on positive shorter-term issues like strong economic data (highlighted by the expected U.S. interest rate rise) and corporate earnings as the month progressed, and less so on the potential longer-term issue of the evolving global trade war (despite President Trump announcing further tariffs on Chinese imports). 

Eurozone equities fell sharply on the last day of the month as the Italian government announced its budget-deficit target for 2019, which will likely be in breach of EU rules on fiscal responsibility and may also lead to downgrades of Italy’s credit rating. 

Bond Performance

Yields rose over July, partly due to reports that the Bank of Japan was considering scaling back its massive monetary stimulus, and higher than expected inflation at month end. Yields also rose on concern about Greece’s debt sustainability. 

Yields of AAA-rated bonds fell over August with economic data showing the region had slowed over Q2, with exports and business confidence seemingly affected by the trade war. With inflation also slightly weaker, the ECB will remain cautious as it unwinds its monetary stimulus programme. The situations in both Italy and Turkey did lead to some volatility and saw yields rising in Broad Sovereign indices. 

The German benchmark 10-year bond yield rose to a four-month high in September after ECB chief Mario Draghi announced a ‘vigorous’ pick-up in underlying inflation and also building wage pressures across the Eurozone area, but these fell back somewhat at month-end as new inflation data showed a slight decrease in ‘core’ inflation (which doesn’t include fuel and food prices etc). Italian government bond yields also rose sharply after the announcement of the 2019 budget-deficit target.

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