September 2021: IG Smart Portfolios Update and Look ahead
Global stock markets rose for the third month in a row in August as minutes from the U.S. Federal Reserve’s July meeting revealed that investors can reasonably expect no material change to the Fed’s policy rate until late 2022.
Prospect of rates remaining at lows for longer help propel global stocks higher
While markets have reflected the positive news on the vaccine rollout and its effectiveness over the course of the year so far, recent economic indicators have soured as consumers appear increasingly concerned about the Covid-19 Delta variant as we approach the winter months.
The Citi Economic Surprise Index remained below zero in August for the first time since May 2020. A reading below zero means that economic data was weaker than expected. Nevertheless, a bleaker outlook for the economy eases pressure on the us Federal Reserve (Fed) to start tightening monetary policy by either tapering asset purchases or increasing the policy rate from its record low target range.
A delay to the tightening of monetary policy is positive for risk assets, which sent global stock indices to all-time highs. The MSCI World Index is now up 17% year-to-date. US tech stocks, which tend to outperform when interest rates are perceived to be staying 'lower-for-longer', gained the most (+3.9%) while energy stocks declined by 1%.
In other areas of the market:
- UK stocks gained across all sectors but FTSE 250 stocks (mid-caps) outperformed the FTSE 100 index by a wide margin (+5.3% versus +2.1%)
- Japanese stocks received a boost as Prime Minister Suga resigned after his approval rating fell to the worst level for a Japanese leader in over nine years. Elections to decide his replacement will be held on 29 September
- In Emerging Markets, certain sectors in the Chinese stock market were crushed after the Chinese Communist Party announced a series of legislations from limiting the use of artificial intelligence (AI) algorithms used by tech companies to limiting online gaming for children
Bond markets shrug off inflation concerns
Weak consumer confidence and employment data, along with U.S. Fed Chairman Jerome Powell’s dovish comments at the Jackson Hole summit, reduced concerns of an imminent tightening of monetary policy which helped keep core bond yields from rising steeply.
- The yield on U.S. 10-year treasury bonds climbed slightly from 1.22% to 1.31%. Analysts are expecting yields to gradually rise to 1.64% by the end of the year
- The UK 10-year government bond finished the month with a yield of 0.71%, with the yield on UK investment grade bonds being around 1.65%
- The Bloomberg Global High Yield Index rose 0.64% over the month as spreads contracted, with yields on the global index closing at 4.3% (a 3.6% spread over U.S. Treasuries)
Alternatives provide diversification benefits with bond yields at lows
Low rates and lofty stock valuations make alternative asset classes increasingly interesting.
In August, we opened a small position in Commercial Property in our Aggressive profile to help diversify returns and provide additional yield to the portfolio. Industrial REITs and healthcare facilities could also benefit from higher spending on infrastructure and health care as economies look to stimulate growth.
In other alternative asset classes:
- The price of gold plunged 4% in a flash crash before ending the month unchanged
- The price of crude oil declined on Covid-19 delta cases and weaker economic indicators which hint that demand for oil could slow just as increased supply is about to hit the market
How have IG Smart Portfolios performed?
Investment returns across the five IG Smart Portfolios have been healthy so far this year as global stock markets have reacted favourably to the welcome progress made on vaccinating large proportions of the population across key developed markets. You can see past performance information here.
While we recognise that parts of public and private markets appear expensive, we are upbeat on the future prospects for global stocks as the economic recovery goes from strength to strength, with global economic growth expected to be 5.8% in 2021.
In line with this constructive outlook for financial markets, we recently made changes to the IG Smart Portfolios.
In the moderate, balanced, growth and aggressive profiles we reduced exposure to low risk assets such as ultrashort corporate debt and short-dated UK gilts as well as UK inflation-linked gilts.
- We reinvested proceeds into longer-dated US treasury bonds, high yield corporate bonds and emerging market debt
- We also increased the overall percentage invested in stocks across these four profiles, increasing the amount invested in UK companies in favour of Japanese stocks, given the favourable outlook for continued economic growth due to the UK’s successful vaccination programme
- In the Growth and aggressive profiles, we took some profit in US stocks by reducing our US exposure slightly and reinvesting proceeds into Emerging Market stocks
- In the moderate and balanced portfolios, we added to positions in UK, US and Emerging Market stocks
- In the Conservative profile we made minor changes, swapping a small amount of holding in UK gilts for Emerging Market bonds as well as switching the exposure to short-term US treasury bonds into the equivalent GBP hedged fund
You can find more information about our range of IG Smart Portfolios here.
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