Below is a quarterly update of Euro Pacific Bank’s mutual fund and separately managed account positioning, related market commentary, and outlook.
Despite rising geopolitical risks, notably in North Korea, equity markets edged higher over the quarter. Fixed interest markets remained pressured as central banks signaled an easing of stimulus measures and guided towards higher interest rates. The pound strengthened against the dollar and yen, but marginally underperformed the euro.
As monetary support is withdrawn and interest rates move back to more normal levels, there is likely to be a degree of uncertainty in global markets. However, we note that this is likely to be a slow and gradual process and unlikely to cause major disruption. Question marks remain over the implementation of Brexit and with sterling having recovered to a 12 month high relative to the dollar we have begun removing some sterling hedges. Additionally, there are rising political risks in Europe, notably Spain and Germany. Despite these issues, robust, albeit unspectacular, global growth and solid earnings are likely to support valuations in the short term.
Investors remained broadly positive about economic prospects as the US Federal Reserve finally announced an end to its Quantitative Easing program. By not reinvesting maturing bonds, it will gradually reduce its holdings in Treasuries and continue to move interest rates back to more normal levels over time.
Our targeted US exposure consisting of SPDR S&P Dividend ETF and Vanguard Russell 2000 ETF rose, outperforming the broader S&P 500 index.
The European Central Bank hinted that it would start to taper its own bond buying program and the Bank of England adopted a more hawkish attitude, suggesting that it would raise interest rates for the first time in a decade as soon as the fourth quarter of 2017. Investors were emboldened by this coordinated policy action from central banks in the belief that the global economy has now moved to a more secure position and requires less monetary support.
With a rise of 2.8% on the quarter, our overweight exposure to the more domestically focused FTSE 250 Index again outperformed the FTSE 100 which was held back by sterling strength, rising only 0.8%. Geopolitical concerns peaked in September and we took the opportunity to reduce our tactical short exposure to the FTSE100.
Overseas returns were again offset by currency movements and we benefited by currency hedging some of our overseas exposure to equities as well as fixed income.
Yields moved slightly higher (and therefore values lower) in both the US and the UK over the quarter as investors weighed up the potential for higher interest rates. However, the yield curve continued to flatten as shorter-dated yields moved higher than longer dated ones. The High Yield sector again outperformed with a gain of 1.5% on the quarter and is now starting to look fully-valued relative to both investment grade issues and emerging market debt.