Bonds still have a role to play in your allocations as they add diversification to portfolios, acting as a shock absorber when equity markets are weak. Once the next recession eventually arrives, it could well be deflationary which would see bond yields reach new lows. Holding bonds would add value in such an event.
Sterling weakened against most currencies, which helped lift equity returns into positive territory. However it is the strengthening Euro which has made headlines over the past three months with nearly all newspapers running stories of airport foreign exchange outlets (which always offer terrible value to travellers) offering parity or worse against the euro. However, when compared with the yen and the dollar, sterling has not really moved.
The euro really started to appreciate after European Central Bank President Mario Draghi said in June that the ECB’s asset purchase programme may end, signalling a shift in policy to traders. The euro’s recent strength will be causing concern at the central bank, which has expanded its balance sheet to a record size to try and stimulate reflationary conditions in the eurozone economy. It would come as no surprise if Draghi now softens his language at the ECB meeting on 7 September.
Commodities in general have actually been very lacklustre. Brent Crude oil is down -15.8% year to date, while the more diversified Bloomberg Commodity Index (which includes precious metals) is off -6.9%.
Safe haven assets are performing much better, with gold rallying 6.5% in August and decisively breaking through the $1,300 mark. Year to date gold is up +13.7% in USD, +9.8% in GBP but just +1.8% in EUR.
IG Smart Portfolios
Client's portfolios are positioned cautiously with respect to fixed income, with an underweight to duration. This means that if interest rates do rise, then short-term losses in the portfolios will be modest. Equities are still the asset class of choice for now, and there is scope to raise the equity allocations a bit higher if an attractive opportunity presents itself.
In the alternatives space, the portfolios have an allocation to gold, which has been performing well.