Low volatility and a continuation of steady returns on equities characterised the third quarter of 2017 as further geopolitical uncertainty failed to upset markets. Global equities grew 3.5%, albeit this return was diluted to just 1.2% for UK investors due to a recovery in the strength of Sterling. Emerging markets once again outperformed, returning 4.5% in Sterling terms as the general appetite for risk persisted.
Markets chose to concentrate on positive corporate earnings news and a generally buoyant suite of leading economic indicators rather than be distracted by continued political uncertainty. Despite an escalation in the war of words between the US and North Korea, a messy German general election result and no further clarity on Brexit, volatility eluded equity markets with the S&P500 yet to post a single day move of 2% or more during 2017. Whilst recent data might justify an air of optimism in markets, valuations remain stretched leading to concerns of complacency.
Within our portfolios we are increasing our slight overweight position to equities as we feel that momentum and optimism in the market will persist at least in the short term, and that monetary policy will continue to be well communicated by central banks. The increase in equity exposure will be in Japan where valuations remain attractive. We continue to position cautiously within the UK and hold an underweight position to domestically focused stocks despite resilience in sentiment surveys and consumption data. We are increasing our general underweight position in fixed income, reducing our position in index-linked gilts and maintaining a large underweight position in conventional gilts.
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