The three month period to the end of August saw positive total returns for most major asset classes in local currency terms. The FTSE World ex UK Index rose 3.9%. Leading the way were Emerging Market equities and Asia ex-Japan equities (MSCI EM Index: +7.5%, MSCI Asia ex Japan Index: +6.7%). In relative terms, UK equities performed poorly (FTSE All-Share Index: +0.6%), with only European equities performing worse (FTSE Eurofirst 300 Index: +0.3%).
Due to some Sterling weakness, overseas equity markets performed more strongly in Sterling terms. The exception was Europe, where the Euro weakened against Sterling as the President of the European Central Bank (ECB) hinted that Quantitative Easing (QE) was more likely following the release of poor macro-economic statistics.
The standout equity markets (in Sterling terms) were Asia ex Japan (MSCI Asia ex Japan Index +8.0%) and Emerging Markets (MSCI Emerging Markets +8.1%). These regions bounced back following a poor start to the year, as fears concerning China’s growth and its shadow banking sector receded.
Gilt returns were strong (FTSE Gilts All Stocks Index +3.8%). By period end, the 10-year gilt yield had fallen to 2.37%, which is anomalous with the continued reassuring macro-economic releases being observed in the UK, which suggest that the labour market is beginning to tighten as activity picks up.
The heightened geopolitical tensions both in Ukraine and Iraq during the period led to a modest spike in the Brent crude oil price during June, however since then the price has fallen sharply, such that the oil price has fallen 5.7% over the past three months.
It is interesting to speculate whether the current fast moving events in Iraq will lead to either less or more oil being exported from that country. The knee-jerk reaction certainly assumed that crude oil production for export would be reduced. However, the southern oil fields are currently unaffected and the big oil fields in the north are controlled by the Kurds, and agreements to allow them to export oil may well be fast-tracked given their strengthened hand to negotiate.
Commercial property returns in the UK continue to be strong. Over the three month period, the IPD UK All Property Index returned 3.7%. Vacancy rates continue to fall, rental growth is accelerating and commercial property markets outside London are beginning to recover. All three major segments of the market (office, retail and industrial) are showing progress.