Markets faced a tough week as a risk-off environment prevailed. The Pound Sterling fell against all major global currencies. Bond markets rallied across the world, with the Bloomberg Barclays Global Aggregate Index (hedged to GBP) returning +0.63%, while Sterling Denominated Investment Grade Bonds returned +0.27%. Equities suffered across the globe. The MSCI ACWI Index of world markets returned -1.20% in GBP terms, this was led by the US market, which fell -1.91%. Value stocks underperformed growth stocks -1.54% vs -0.87%.
This downside volatility was driven by a number of events, most of which stemmed from the Oval Office. The continuing trade tensions between China and the United States spurred a move out of Equities and into perceived safe assets. The German 10 year Bund yield traded at -0.16% on Tuesday, with the 10 year US Treasury yield touching a fresh two-year low on Friday. In what Bloomberg described as a “true black swan event”, President Trump suddenly threatened to slap a five percent tariff on all Mexican imports unless it stepped up efforts to stop illegal migration. Tariffs are increasingly being employed by the President as a weapon of policy, across multiple fronts.
In spite of the bluster from 1600 Pennsylvania Ave, US stocks remain very much in favour on a global basis. The gap between the valuation of US Equity markets and the rest of the world is at record highs. As a result, many investors are looking for ways to protect against a falling dollar and/or falls in the value of the Equity market itself. Local Currency Emerging Market bonds may offer such protection and are becoming increasingly popular with GBP based investors.
Content courtesy of Beaufort Investment Management