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Tiller investor update: September 2018

 

The price of oil was back in the headlines in September as Brent Crude rallied past $80 taking its year to date gains past 24%. For comparison the best performing equity market (on a non-currency adjusted basis) has been the S&P 500 with a gain of just above 8%.

During the month, the US Federal Reserve raised base rates again and signalled two things. Firstly, that another raise is likely in December, and secondly that their stance was no longer ‘accommodative’ (meaning that they are no longer looking to help expand the economy). The second was achieved by simply removing the word from their latest closely watched statement.

Interestingly they continue with raising rates despite the fact that, as they acknowledge, indicators of long-term inflation expectations are little changed.

This, along with communicating they are no longer accommodative, is a reminder of how late in the economic cycle we are.

Given the late-cycle phase we find ourselves in, it is no surprise to see bond yields have been rising. In September the yield on 10-year US Treasuries moved above the 3% level that had been proving difficult to break. Unlike past breaches of this level; this time it has stayed above 3%.

Rising US bond yields and a stronger dollar has had two knock-on effects:

 

  1. Emerging markets with large dollar-denominated debt are struggling; for example Argentina and Turkey. This could become more serious if countries such as India and Indonesia find themselves dragged into a similar situation, as they make up a larger percentage of emerging market indices.
  2. Low-risk portfolios across the wealth management industry are losing money this year whilst higher risk portfolios make money. This is due to the inverse relationship between bond yields and prices. As low-risk portfolios traditionally hold a lot of bonds, falling bonds prices have dragged overall portfolios returns down. To give some context, the private client indices we look at (referred to as the ARC Private Client Indices) show that the estimated performance for the year to date, ending September, was -0.5% for the cautious index. The balanced index by contrast is up 0.4%.

 

Due to the above two factors, our portfolios have less emerging market exposure than we would normally hold, given the cheap valuation of these markets, and our bond exposure has a strong bias toward being short-dated and therefore less exposed to rising bond yields.

During the month we refreshed our thinking on Brexit and the potential impact on portfolios of a deal or no deal. We will share details of our latest thinking and any portfolio changes in our next monthly update.

 

Disclaimer:

The views contained herein are not to be taken as a recommendation or advice.  Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. A mandatory sell of a theme may result in a taxable capital gain or loss.  All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.  It is very important to do your own analysis before making any investment based on your own personal circumstances.  You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on Tiller’s website and wish to rely upon, whether for the purpose of making an investment decision or otherwise.  It should be noted that investment involves risks, the value of investments may fluctuate in accordance with market conditions and investors may not get back the full amount invested.


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