Please find below our Market Update for the week ending 5th October 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
Market data
Several the Blue Sky team were at the Chartered Institute of Securities and Investment annual conference at Birmingham NEC this week, keeping our knowledge right up to date. One wrong turn in the car park and we could have been at the Conservative Party Conference! Teresa May announced the intention to end austerity measures providing we get a ‘good Brexit’, though it will be interesting to see what actual signs we see in next month’s Budget. The net result was that sterling rose and then fell the next day, seemingly anchored for now around the £1.30 level against the US Dollar.
Slightly supporting Mrs May’s optimism, was that our Gross Domestic Product rose a touch in Q3 to 0.5%, a little above expectation. We have said before, that there are several reasons to be positive on the UK market, not least seeing that in Q3 alone a record £31 billion was paid out in dividends. This gives us the feeling, that at least for now, corporate profits are broadly in good shape.
In the US much remains the same, with the Dow Jones having hit another record level this week. This came from the economy creating a much higher number of new jobs than forecast and the continuation of strong company profits. Whilst some forecasts suggest growth for Q3 may slip back a little, we expect this to be still over 3% and supportive of our positive view of investing in the US.
Very relevant to world economics is the price of oil that touched a four year high this week. This we see as one of the biggest risks we face. Against this backdrop, President Trump has somewhat characteristically stated that OPEC are ‘ripping off the rest of the world’, in an attempt to talk down price levels. Whilst there will be ebb and flow here, this rhetoric, combined with Saudi Arabia agreeing to increase production, has cooled prices slightly.
In Europe, the apparent risk of Italy breaking ranks with the Eurozone, abated when they agreed to reign in spending and reduce their budget deficit. That said, we expect more discord from different nations who seek to balance their national interests with the need to ‘toe the EU line’. This is now coming into focus more in the key nations, with President Macron’s approval ratings at a very low level, and perhaps for the first time, Chancellor Merkel under serious pressure at home. For now, the economics of the Eurozone remain on track for combined growth of 0.5% this last quarter, curiously the same as the UK.
As we stated in our last update, China is seeking new alliances and fresh markets, to help offset trade issues with the US. This week, the Vatican has ended its 67 year stand off with China, when they agreed to work more closely together. The Chinese economy did slow during September and this is perhaps the first visible signs of the effect of tariffs. In response, the central bank has stated that it will do what is necessary, with the likely easing of monetary policy.
Emerging markets may at last be seeing some positive signs, following a torrid time especially for Turkey and much of Latin America. The ‘composite index’, used to measure share prices across these markets, has been gently rising in the last few weeks. This is largely because investors are looking for value and as such, monies are moving back into these markets. We have modest commitments in most of our Portfolios and are actively looking to increase these as good opportunities present themselves.
Blue Sky’s market comments in conjunction with our investment partners

We have not made any changes to the funds we hold this last week, but as you will know the individual managers will have been active themselves on your behalf. So, this week we thought we would provide a little more insight into one of the funds that we use for all our investors- Fundsmith Equity. We see this as a higher risk offering and so in our lower risk mandates we have a smaller holding to reflect this, whilst still benefitting from this excellent fund. In simple terms, the fund invests in a small number of Global shares and has the philosophy that high quality stocks in resilient, growing companies can offer great value. The fund is run by Terry Smith, a city veteran with a tremendous track record, who invests his own money in the fund, which is always a positive sign.
There are usually between 20 and 30 separate investments. Within the top 10 at present are quality names like Microsoft, Paypal, Facebook, Unilever and Reckitt Benckiser, Nurofen, Lemsip and many others. Geographically, it is dominated by successful US companies but can invest anywhere and in any sector. Performance has been exceptional, outperforming the wider share market in each of the last 5 years. The fund takes a long-term approach, likes to keep things simple and, in our view, does everything well, so we anticipate that it will continue to shine in the future.

At 7IM we are receiving lots of questions about Brexit so this week we will focus our comments on what we see and how we are reacting.
Saturday 29th September represented the three-quarter mark of the UK’s two-year transition period for exiting the European Union. Although there have been signs of progress and a 39bn Euro divorce bill having been agreed, there remains significant uncertainty about what our relationship around trade will look like. The Government is divided on the issue and this is our main concern. From an EU perspective, they are concerned that a UK friendly deal will set a precedent for other members who may wish to follow suit.
From an investor’s perspective, the market continues to assume that a deal will be reached. Accordingly, the impact of a ‘No deal’ outcome could be painful, at least in the short term. The FTSE, on average, derives less than a quarter of its earnings from Europe and so the then inevitable weakening of Sterling will help but until a new trade regime is agreed, companies are likely to suffer.
In the meantime, the UK economy is in pretty good shape and we feel that there are other very important factors. Mark Carney agreeing to stay on as Governor of the Bank of England is helpful as it maintains confidence and continuity of monetary policy. The fragility of Europe and its politics is also relevant with EU elections set for 2019.
As such, for us as investors, we are prudently optimistic and with global growth on track, it leaves the UK as our main source of uncertainty. We remain as diversified as possible and, in the UK, we are focussing on insulating our portfolios from any sharp moves in the value of Sterling. We are confident that we can react to whatever happens.
Sources: LGT Vestra and 7IM