- Multi-Asset class funds and portfolios reflect diverse returns globally
- Fixed income pushed lower by rising government bond yields
- Global, Japan and US equities higher in sterling terms
The performances of the Liontrust Multi-Asset class portfolios and funds reflected the diverse directions that financial markets took globally in October.1 Rising global government bond yields drove fixed income assets lower across the board and most major stock markets except for Japan were down in local currency terms, although in sterling terms, global, US and Japanese equities were higher. Commodities rose in sterling terms, with oil and gold higher on ongoing concerns over conflict in the Middle East and Ukraine.2
Stronger than expected US labour market and retail sales data persuaded markets that the Federal Reserve’s rate cuts could be slower and shallower than expected, while annual inflation in September was slightly above expectations at 2.4% versus 2.5% in August.3 Treasury yields rose to their highest levels in three months, weighing on their capital values, and the US dollar strengthened on uncertainty ahead of the impending US elections.4
US equities gave up the gains they made in the first half of the month in a market pullback that ended a five-month rally.5 However, BA Beutel Goodman US Value was leading contributor for us over the month. While we are neutral on US equities overall, we rate small caps a positive four out of five in our tactical outlook and CT American Smaller Companies also contributed to performance.
The US pullback was led by technology stocks. Disappointing earnings from Microsoft and Meta, the parent of Google, led the move down in a rotation away from the mega caps into stocks offering cheaper valuations. We can see weaker returns at some stage from the US mega caps that have dominated for the past couple of years, and we believe the market leadership could rotate from them to other parts of the US stock market and elsewhere in the world.
ECB cuts rates again
Europe ex-UK was the equity region that declined the most in sterling terms. There were some disappointing corporate earnings results and economic data, while the threat of tariffs from a potential Trump presidency and trade tensions with China increased.6 The European Central Bank (ECB) cut interest rates for a consecutive time by 25 basis points to 3.25%, in line with market expectations.7 ECB president Christine Lagarde said the disinflationary process in the bloc was well on track. Our tactical outlook on Europe ex-UK equities remains neutral.
Labour delivers first budget
In the UK, the new Labour government delivered its first budget, which raised concerns over how strong market appetite would be for a £28 billion a year increase in government borrowing and prompted a recalibration of interest rate expectations given the government’s expansionary spending plans.8 Gilt yields rose, putting pressure on capital values, in part reflecting the strong rises seen in government bond yields in the US and Europe. We believe gilts remain reasonable value and offer the prospect of delivering real yields over the medium term as the inflationary outlook moderates. There was some reprieve in the budget with clarification on the status of inheritance tax relief on AIM shares, giving a fillip to small caps. We have a positive outlook on UK equities, including small caps, which appear to be cheap compared not only to their domestic large cap counterparts but also to other markets.
China stimulus fades
Emerging market and Asia Pacific ex-Japan fell the most in domestic currency terms in October, but their declines were ameliorated in sterling terms. Higher risk assets were repriced in October amid rising global yields and as the US dollar strengthened ahead of the November presidential and congressional elections.9
The momentum generated by the China stimulus announced in September faded, while further pressure on sentiment was added by China’s third quarter GDP coming in at up 4.6% on the year, which was the slowest figure in a year and a half and below the official full-year target of 5.0%.10
Japan holds rates
In Japan, political uncertainty rose as the ruling Liberal Democratic party lost its coalition majority. The Bank of Japan (BoJ) held interest rates at 0.25% as expected, but BoJ Governor Kazuo Ueda said that politics would not affect monetary policy decisions and signalled further rises still lay ahead.11 Japan was the only major equity market to rise in domestic currency terms in October.
Opportune time
Moderate market pullbacks are an investing inevitability and the one in October should be seen in a longer-term context. For example, global equities were up 26.9% in sterling terms over the year to end-October, while fixed income was also positive across the board over the period, including a 17.2% rise in global high yield hedged back to sterling.2 We maintained our positive outlook for global financial markets in our third quarter Tactical Asset Allocation review and we continue to favour the UK, Japan, Asia ex Japan and emerging market equities and US small caps. While we are neutral overall on fixed income, we also favour corporate and high yield bonds. We believe investors will benefit from a diversified portfolio that active managers can help to provide, particularly through exposure to small and mid cap equities, bonds and alternatives.
History has shown that while investors will experience market dips and volatility from time to time, these events won’t stop the long-term positive performance of markets. The cheap valuations in many financial assets globally mean that we believe now is an opportune time to identify the positive potential in markets and put in place investments for the long term.
1Source: Financial Express, 1 November 2024
2Source: Bloomberg, 4 November 2024
3Source: Financial Times, 10 October 2024
4Source: Financial Times, 31 October 2024
5Source: Financial Times, 31 October 2024
6Source: Reuters, 30 October 2024
7Source: Financial Times, 17 October 2024
8Source: Financial Times, 1 November 2024
9Source: Reuters, 5 November 2024
10Source: Financial Times, 18 October 2024
11Source: Financial Times, 31 October 2024
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds and Model Portfolios managed by the Multi-Asset Team may be exposed to the following risks:
Credit Risk: There is a risk that an investment will fail to make required payments and this may reduce the income paid to the fund, or its capital value. The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay; Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss; Liquidity Risk: If underlying funds suspend or defer the payment of redemption proceeds, the Fund's ability to meet redemption requests may also be affected; Interest Rate Risk: Fluctuations in interest rates may affect the value of the Fund and your investment. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; Derivatives Risk: Some of the underlying funds may invest in derivatives, which can, in some circumstances, create wider fluctuations in their prices over time; Emerging Markets: The Fund may invest in less economically developed markets (emerging markets) which can involve greater risks than well developed economies; Currency Risk: The Fund invests in overseas markets and the value of the Fund may fall or rise as a result of changes in exchange rates. Index Tracking Risk: The performance of any passive funds used may not exactly track that of their Indices. Any performance shown in respect of the Model Portfolios are periodically restructured and/or rebalanced. Actual returns may vary from the model returns.
The risks detailed above are reflective of the full range of Funds managed by the Multi-Asset Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
