The three month period to the end of July has seen positive total returns for most major asset classes except UK equities, which saw a marginal decline. Despite this, it has been a difficult time for active equity fund managers to navigate as medium and smaller sized companies (which have performed well over the past five years) continued to underperform their larger peers (FTSE 100 Index flat, FTSE 250 Index -2.0%).
In local currency terms, equity markets outside the UK performed more strongly compared with the UK (FTSE World ex UK Index 3.6%), however the strong British Pound reduced the return to UK investors to 2.9%, still a strong performance relative to UK equities.
Outwith the UK, the standout equity markets (in Sterling terms) were Asia (MSCI Asia ex Japan Index +10.5%) and Japan (MSCI Japan +10.1%). These regions bounced back following a poor start to the year as fears concerning China’s growth and its shadow banking sector receded somewhat, and more favourable economic data concerning the Japanese economy was released. European equities (FTSE Eurofirst 300 Index) returned 1.0% in local currency terms. However, the concerted push by the European Central Bank (ECB) to weaken the Euro against other major currencies including the British Pound did not help returns for British-based investors (FTSE Eurofirst 300 Index, in Sterling terms, -2.5%).
Gilts continued to generate a positive return (FTSE Gilts All Stocks Index +1.4%). The gilt market has been in the thrall of the Governor of the Bank of England’s (Mark Carney) comments. Investors initially interpreted Carney’s pronouncements to suggest that interest rates may rise sooner than expected and that special controls would be imposed upon mortgage lenders, which would serve to cool the economy. However, Carney then appeared to row back from his more hawkish interest rate comments and the recently announced constraints imposed upon mortgage lenders were considerably less draconian than first feared.
The heightened geopolitical tensions both in Ukraine and Iraq during the period lead 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 1.9% 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 for independence.
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.