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LCP Investment Summary - September 2017

Posted on 2 October, 2017 by Administrator

LCP Investment Summary - September 2017

Global equity markets rose 2.7% (in € terms) during September.

Eurozone equities rose 4.4%, recovering from their falls in August, helped by continuing positive global economic data and also the weakening of the Euro which was a positive for the many large exporters in the region. The banking sector was boosted by expectations that central banks in both Europe and the U.S. will tighten monetary policy in the coming months. Markets also rose after the German election result although delays in forming a coalition government may concern investors in the near-term.

North American equities rose 2.2% in $ terms (and 2.7% in € terms), hitting all-time highs on the last day of the month. Investors were concerned with the US/North Korean situation at times over September but reacted generally positively near month-end to President Tump’s long-awaited tax plan, although there were some concerns in relation to costings and the likelihood of it passing through Congress. The Federal Reserve announced that it will start gradually cutting its $4.5 trillion balance sheet in October and also hinted at an interest rate hike in December, which investors took as further signs of confidence in the US economy.

Bonds

Longer-dated eurozone bond prices fell 2.0% in September, with the yield on the AAA Eurozone 15+ Year Index rising to 1.10% by month end. The Euro Broad Sovereign 10+ Year Index fell 1.1% with its yield rising to 1.73%.

This rise in yields was partly due to the weaker Euro as some investors believed that the ECB may now look to begin scaling back its ultra-easy monetary policy which has helped keep yields at very low levels since March 2015. The announcement of the Trump tax plan in late September also saw bond yields rising. However they did fall back somewhat when lower-than-expected inflation data was released on the last business day of the month. 

Sample DB Scheme

The funding level of our sample DB scheme rose to 96.9%, as its assets rose and its liabilities (calculated using a MFS proxy) fell over the month.

Sample DC Schemes

Our High and Medium Risk Strategies rose in September but the Pension Purchase Strategy fell due to its high allocation to longer-dated eurozone government bonds.

Overview of Performance in Q3 2017      

Global equities rose 1.4% (in € terms), in what was a relatively benign quarter for equities, with markets continuing to move higher on improving earnings growth.

But investors also reacted negatively at different times to geo-political issues over the quarter, especially the increase in tensions between North Korea and the US during August, and then again in September.

Equity Performance

European equities rose over 4.5% in Quarter 3. Markets were initially weak in July due to lower oil prices and the ECB’s possible change to its ultra-easy monetary policy, but investors were then reassured by corporate earnings and solid economic data which continued into August (and which also helped push the euro higher). However markets fell sharply a number of times over North Korean/US tensions and also following the Barcelona attacks, hitting a six month low near the end of August. Markets recovered in September due to the continuing positive global economic data and also the weaker Euro which was seen as a positive for the many large exporters in the region. Markets also rose after the German election result although delays in forming a coalition government may concern investors over the coming weeks.

North American equities rose 4.5% in $ terms (1.0% in € terms) over the Quarter. Markets rose in July, with over 70% of the second quarter company earnings reported beating analyst expectations. The US Federal Reserve also said that it would start to reduce its $4.5 trillion government and mortgage debt ’relatively soon’. Stronger than expected US GDP data released near the end of August cheered investors after what had been an otherwise difficult month with ongoing tensions between North Korea and the US, the Charlottesville rally and its fallout, more Trump sackings and the threat of a US government shutdown all rattling investors. In September, investors reacted generally positively near month-end to President Tump’s long-awaited tax plan, although there were some concerns of how it would be costed and if it would pass through Congress. The Federal Reserve hinted at an interest rate hike in December, despite the recent storms, which many investors took as a sign of confidence in the US economy.

Emerging Markets equities rose 7.7% in local currencies (4.1% in € terms) over the quarter, as the improving global economic growth is generally a positive for emerging market exporters. This was despite sharp fall in late September due to the rise in the US$ following comments from the US Federal Reserve about a possible interest rate rise in December.

Bond Performance

Longer-dated eurozone bond prices rose 0.6% over the quarter, with the yield on the AAA Eurozone 15+ Year Index falling to 1.10% by the end of September. 

Longer-dated yields continued to rise in July, following on from the ECB comments at the end of June, despite some conflicting inflation data at the end of July. These yields then fell sharply in August as investors looked for safe-haven assets following the rise in tensions between North Korea and the US, and also after the Barcelona attacks, both of which overshadowed the continuing improvement in eurozone economic and inflation data. 

Some investors also felt that the stronger euro may lead to a delay, or a slowdown, to the end of the ECB’s ultra-easy monetary policy which has helped keep yields at very low levels since March 2015. This view relaxed somewhat in September as the euro weakened, leading to a rise in yields again. However they did fall back somewhat when lower-than-expected inflation data was released on the last business day of the September.

Market Performance to 30th September 2017 

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