Please find below our weekly Investment Snapshot for the week ending 2nd February 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
The US has now begun to be joined by other major financial nations in selling off government bonds as investment risk appetite increases, with the selling lifting the bonds’ yields. Germany’s 10-year bonds touched their highest level since December 2015, rising back over 0.7%, up 3.6 basis points at 0.731%. However, shorter-dated US government bonds underperformed – flattening the yield curve – after the Treasury announced it would increase the sizes of two- and three-year auctions by £2bn per month over the next quarter, with sales of longer-term debt increasing by $1bn.
The trend for a weaker dollar is becoming re-established, with a rising euro evident on the stock markets, after a bounce for the US currency proved short-lived. January’s US Central Bank policy meeting – the last with Janet Yellen as it’s chair – looked to leave the way open for such a rate rise as soon as March, as experts point to an 83% chance of a rate rise at its March meeting. The trend for a weaker dollar soon returned, not least as hopes for synchronised global growth look to leave room for other central banks to catch up with the Fed on tightening monetary policy.
This led to gains in much of Asia as reacting to the Fed statement remained more upbeat, although Hong Kong stocks fell. Tokyo’s Topix index gained 1.8% on the day, with the Nikkei producing similar results as it closed on Thursday with a one-day gain of 1.68%.
Gary’s market comments in conjunction with our investment partners
Unlike many portfolios with an income mandate, the Strategic Income Portfolio can provide both asset class and underlying stock diversification. LGT believe that this diversification allows them to achieve a smoothed return whilst achieving their target of providing clients with 3.5% income. Recently, they have reduced the equity component of the portfolio, favouring a lower equity risk level for a slightly lower yield (3.5%). Actively managing the investments allows LGT to ignore the index and focus on delivering a consistent sequencing of income for clients whilst keeping an emphasis on risk-adjusted returns. The investment management team focuses on the requirement for a sustainable and attractive level of yield combined with capital preservation and longer-term growth.
In addition to the significant overweight in Sterling denominated assets versus Strategic Asset Allocation, 7IM also entered two FX options on GBP/USD with strikes of US$1.35 and US$1.45 in July 2016 and February 2017 respectively. The call options are designed to protect the portfolios against a sudden spike in the value of Sterling, which would impact foreign currency holdings. The US$1.35 option has particularly supported portfolios in January 2018 given the weakness of the US Dollar.
However, the team believes now is a good time to exit the US$1.35 option after that good performance and are looking at alternative ways of protecting the portfolios. The US$1.45 option is due to expire on 2 February.
Sources: LGT Vestra and 7IM