Volume 1 Issue 6, October
Broadly, emerging markets returned to their streak of outperformance vs. developed markets, though there was a great deal of variation in returns during the month within the two sub-asset classes. Mexico (-7.8%), Pakistan (-6.9%) and Colombia (-6.4%) were the worst performing markets while South Korea (+8.2%), Egypt (+7.9%) and Vietnam (+7.4%) were the best. Among the largest countries, the long bull market continued with the US, Japan and Germany up 2.4%, 5.3% and 2.0% respectively.
Global Fixed Income
There was no particular pattern to rates in the month, with the largest positive returns in Nigeria (10 year -78bp), Portugal (-32bp) and Italy (-28bp), while long-term bonds in Turkey (+82bp) and South Africa (+55bp) fell. Large markets were mixed—US (+5bp), Japan (-1bp), Germany (-9bp).
Americas Minutes from September’s Federal Reserve FOMC meeting showed concern about weak inflation. Q3 earnings growth expectations fell, toward lower single digits vs. double digit increases in H1. US September CPI rose at its highest pace (+0.5%) since early in the year. New all-time records were set in the major indices. The tax reform debate began to heat up in the US. Mexican markets (equities -3.4%, 10 yr yields +40bp) were punished on worries about a NAFTA renegotiation.
EMEA Euro-bloc August industrial production numbers came in strong at nearly +4%. Spanish equities underperformed most European markets on the dispute between Catalonia and the central government in Madrid. ECB kept rates steady at its MPC meeting, as expected. The one change was that while QE would remain at €60 billion through the end of 2017, it would cut this in half to €30 billion in the Q1 to Q3 period of 2018 and then extend the program as needed. Despite the trimming of QE, Draghi emphasized that he intended to maintain low rates
Asia President Xi Jinping was given another five year term at China’s 19th Party Congress and was acknowledged among the most influential Chinese leaders in history. Official Chinese Q3 GDP grew by 6.8%. Shinzo Abe’s LDP party remained in power and increased their control, taking the majority of seats in Japan’s general election.
Crude prices rose and held above $50 in October. This followed an announcement by Saudi Arabia to cut oil exports. Copper also rallied, while global real estate underperformed equities and physical commodities.
Concern over some of the recent shifts in ongoing trends, both in equity markets and rates, led us to apply a tactical tilt to move closer to benchmark weights at the end of last month. Best detractors in the equity portfolio were Switzerland (-5bp), Canada (-1bp) and Sweden (-1bp) while largest contributing markets were the US (+1.43%), Japan (+46bp) and China (+8bp). The fixed income portfolio was dragged down most by China (-37bp), Turkey (-10bp) and Argentina (-8bp) while Italy (+7bp), India (+6bp) and Germany (+4bp) provided the biggest boost to bond returns.