WealthSelect Managed Portfolios quarterly report - September 2023 (Q3 2023)

Our market summary

Global equities finished a tumultuous third quarter in positive territory with a modest return of 0.7%. Japan, China, and the UK were the top-performing regional markets while the US gained 1% as European markets declined. At a sector level, commodity and energy stocks were among the top performers, as both Russia and Saudi Arabia announced cuts to oil production which drove prices higher. Meanwhile, bond markets sold-off with US Treasuries suffering the biggest losses.

Developed markets (ex UK) equity

US equities gained a modest 1.0% following a largely disappointing quarter. Sentiment was upbeat at the start of July, with investors anticipating an end to US interest-rate hikes on the back of positive inflation news. However, a more cautious outlook from the US Federal Reserve (Fed) and the prospect of interest rates remaining higher for longer, weighed heavily, especially on technology stocks. Meanwhile, energy stocks were among the few positives.

European equities declined by 2.0% over the quarter, mostly due to interest-rate concerns. However, data released late in the period showed that inflation in the bloc had fallen to a two-year low, prompting speculation of near-term rate cuts from the European Central Bank (ECB) despite another European rate rise in September. Like the US, energy stocks were an outlier as the only positive sector.

UK equity

It was a more positive period for UK equities, which gained 2.3%. Domestically-focused stocks, which had suffered throughout much of the year, rallied on the prospect of inflation having peaked. The news allowed sectors such as property and financials to recover some of their recent losses. Meanwhile, energy stocks were the main contributor to positive performance as they also benefited from sterling’s weakness relative to the US dollar. Currency exchange rates impact investments in other countries. If the currency of the investment rises compared to sterling, this adds to returns; if it falls, this reduces returns.

Emerging markets equity

Emerging markets outperformed global equities, rising by 1.3%. Turkey and Egypt were among the top-performing countries as markets reacted positively to announcements from their respective central banks. Despite continued scepticism regarding the nation’s reopening, Chinese equities climbed by 2.3% following a release of better-than-expected economic data. Brazil, Poland, and Chile were among the worst performers of the quarter.

Fixed interest

US Treasuries (US government bonds) fell in the quarter, owing partly to a US credit-rating downgrade in August. More positively, peaking inflation led to a slowdown in interest-rate rises, with the Fed opting to hold rates in September. The Bank of England followed suit, as UK inflation finally appeared to be easing. Sterling corporate bonds (issued by companies) were positive as a result despite UK gilts (UK government bonds) falling. 

UK equity

UK rebounds

The UK market was one of the top-performing regions over the quarter. In part, this was due to the strong rally in the oil price, which provided a boost for energy names and helped to lift the performance of the main market thanks to its heavy exposure to the sector. In addition, the weakness of the pound provided a tailwind to many of the UK’s larger-cap companies which have substantial revenues from overseas.

Positive returns all around

All our underlying UK managers delivered gains. The top-performer was the Quilter Investors UK Large Cap Income Fund (Artemis), despite an underweight position to the energy sector. This was offset by strong stock selection within its financials and consumer staples allocations. Consumer staples is the term used for companies that supply goods or services that are typically considered essential – think food and beverages.

UK looks attractive

Despite the recent rally, the UK stock market continues to look attractively priced in absolute terms, relative to its own history and to other developed markets. Even in the absence of a bullish view on the UK economy, the valuation discount on offer in the UK for numerous world-class, internationally-orientated companies, may see investors enticed back.

Fixed income

Government bonds sell-off

Global government bonds sold off meaning their yields moved higher, and prices dropped. While the US economy continued to surprise in its resilience, investors pushed out the expected timing of central bank rate cuts, with the Fed also suggesting fewer cuts in 2024 than previously anticipated. Concerns over US debt issuance and persistent budget deficits also weighed on US Treasuries as did a downgrade by the ratings agency Fitch. As such, UK gilts outperformed global government bonds, and corporate bonds (issued by companies) outperformed government bonds, with our global and sterling corporate bond holdings delivering modest gains.