Monthly Commentary – October

As the third quarter earnings season began well and the US Federal Reserve cut interest rates for the third time this year, stockmarkets hovered around record highs. However, the pound’s strong rally against other currencies meant that much of this performance was lost for UK investors.

The rebound in sterling came as it appeared that the chances of a Brexit resolution had improved. Although Boris Johnson failed to meet his Halloween deadline, investors were heartened by the EU’s decision to grant a ‘flextension’. This gives Parliament time to hold a general election that may clear the way for a deal to be approved.

In the US, Federal Reserve officials signalled that October’s rate cut would be the last for the time being as they wait to see how economic data unfolds. A Sino-US trade deal remains elusive but investors were encouraged by the prospect of an interim accord. However, China cast doubt on the likelihood of agreeing a final trade deal with President Trump. The looming US presidential election and the formal impeachment proceedings against the White House’s current occupant appear to have galvanised Beijing’s hopes for a more favourable outcome.

Japan was the month’s strongest market, helped by hopes of further central bank stimulus though the Bank of Japan ultimately opted to take no action. With signs of progress in the Sino-US trade talks, Latin American markets were also strong. This was despite the election of populist candidate Alberto Fernandez in Argentina and civil unrest in Chile. Meanwhile, European shares were buoyed by the extension of the Brexit deadline. The weakest returns came from the UK, where many of the largest companies were hurt by the stronger pound, which can depress overseas earnings.

The best performing sector was healthcare, helped by positive results. These included those of our holding Pfizer, which lifted its full year earnings forecast after strong sales. Information technology was also strong; we have no exposure here as we believe that the sector’s stretched valuations already reflect lofty expectations. Symbolically, the tech-orientated office rental business WeWork had to be rescued by major shareholder Softbank. To us, WeWork epitomises the folly of profitless growth that is currently in vogue with many other investors. The weakest returns came from energy stocks as the oil price softened.

Sterling’s rebound in October highlighted the potential of the unloved UK market. We believe that many UK stocks have been sold down excessively on Brexit fears and we have several holdings where we see considerable potential for recovery as the economic outlook becomes clearer. Among them is British Land, one of our best performers in October. This is a UK listed real estate investment trust that focuses on prime UK office, retail and residential locations. British Land has responded to its challenges by strengthening its finances and concentrating its high quality portfolio in the properties with the best prospects. Its shares trade at a deep discount to the underlying value of its assets – we believe our holding will benefit as confidence is restored in UK assets.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.