Markets were more muted during the third quarter with lower trading volumes inthe summer months and several geopolitical headwinds – in the form of US trade tariffs and ongoing Brexit negotiations – prompting some caution.
As such, following a strong second quarter, returns were lower during the third quarter of the year.
In the following article, FE Trustnet takes a closer look at the third quarter of 2018 – considering factors such as investment style, FTSE All Share industries and Investment Association funds.
Asset classes
From a top-down perspective, there were few very strong gains recorded during the third quarter, although oil continued to march on as the Brent crude spot price rose by 6.58 per cent.
Oil has moved higher over supply concerns, according to analysts, with the spot price up by 34.39 per cent over the first three quarters of the year.
Performance of indices over Q3 2018
Source: FE Analytics
Global equities ended the quarter 5.57 per cent higher, despite concerns over the ongoing trade dispute between the US and China.
Global bonds were flat over the quarter with the Bloomberg Barclays Global Aggregate index adding just 0.31 per cent as the Federal Reserve and Bank of England both increased interest rates.
Meanwhile, gold declined as the dollar continued to rise and belief in the US markets remained strong.
Anthony Willis, investment manager at BMO Global Asset Management, said while the global economy is likely to enjoy another year of stimulus-fuelled growth into 2019, the impact will likely fade into 2020 as central banks begin to unwind years of accommodative policies.
“Investors should also consider that we go into any downturn with equity and bond markets at elevated levels and without many risks to the outlook priced in,” he added.
“Given the forward-looking nature of markets, any downtown in the economic outlook in 2020 should become a feature of risk asset valuations in the coming months.”
Geographies
The best performing geography of the third quarter was the US, where the S&P 500 overtook the previous record for the longest-ever bull market rally on 22 August, having begun on 3 March 2009.
During the quarter the blue-chip US index was up by an impressive 8.89 per cent and is up by 14.20 per cent for the first three quarters of the year.
Another strong performer over the quarter was the Japanese TOPIX index, which rose by 4.51 per cent.
Performance of indices over Q3 2018
Source: FE Analytics
The European equity market – as represented by the Euro STOXX index – grew by 1.35 per cent and the MSCI Emerging Markets index arrested some of the decline seen during 2018, so far, with a flat 0.13 per cent gain.
A calamitous summit of European heads of government for UK prime minister Theresa May in Salzburg raised the prospect of a ‘no deal’ Brexit and continues to deter international investors from the UK equities, as such the FTSE All Share index was down by 0.82 per cent.
Industries
With the FTSE All Share down during the third quarter, many sectors in the domestic market struggled to make positive returns.
As such, the best-performing part of the market was healthcare, which rose by 5.54 per cent during the third quarter. The only other area delivering a positive return over Q3 was oil & gas, which – boosted by the higher oil prices – was up by just over 2 per cent.
Performance of indices over Q3 2018
Source: FE Analytics
The worst hit sectors were telecommunications and utilities, with significant single-digit losses over the third quarter.
On an individual stock basis, the best-performing FTSE 100 name was hospitality group Whitbread, which rose by 19.15 per cent following the £3.9bn sale of its Costa Coffee business to Coca-Cola.
“The timing of the deal by Whitbread will be seen by many as being astute, given that Costa Coffee was bought for £19m [around] 23 years ago and sold at what could be a peak in the cycle after a couple of decades of strong growth in coffee market and the rise of the coffee culture,” noted Hetal Miah, investment research analyst at The Share Centre.
“The sale is a quicker and cleaner process than a demerger and will allow Whitbread to sooner focus on building its Premier Inns hotel brand and restaurant chains. The proceeds from the sale should also allow Whitbread to pay down its debt and make contributions to the pension fund.”
Investment style
Quality stocks had the strongest quarter, outperforming both the growth and value styles with a return of 7.05 per cent.
Performance of indices over Q3 2018
Source: FE Analytics
Global growth stocks marginally outperformed their value counterparts although the level of uncertainty in markets means it is difficult to make calls, according to GAM Investments chief economist Larry Hatheway.
Equity funds
With the US equity market continuing on its record-breaking run, it was little surprise to see the IA North America sector topping the performance tables for the third quarter, with an average return of 7.23 per cent.
The best-performing IA North America fund of the quarter was the £538m AXA Framlington American Growth managed by veteran manager Stephen Kelly and a return of 12.22 per cent.
Other double-digit returns were recorded by the UBS US Growth, Amundi Pioneer US Fundamental Growth, Legg Mason ClearBridge Growth, and Guinness US Equity funds.
Performance of sectors over Q3 2018
Source: FE Analytics
The IA North American Smaller Companies sector was the next best performing peer group with a return of 5.98 per cent. Its best performing fund was LF Miton US Smaller Companies, up by 12.68 per cent.
The worst performing equity sector was the IA China/Greater China, where the average fund was down by 6.1 per cent, with the Matthews Asia China Small Companies fund at the bottom of the table with a loss of 14.36 per cent.
Bond funds
There was little cheer among the fixed income sectors where returns were subdued and the best-performing sector was the IA Sterling High Yield sector with a return of 1.89 per cent.
The top fund from the sector was the £748.1m, five FE Crown-rated Schroder High Yield Opportunities fund, which was recently taken over by Daniel Pearson and Konstantin Leidman from Michael Scott and was up by 2.87 per cent.
Elsewhere. the IA Global Bonds, IA Global Emerging Market Bonds and IA Sterling Strategic sectors recorded small gains.
Performance of sectors over Q3 2018
Source: FE Analytics
The worst performing sector was IA UK Gilts which recorded a loss of 2 per cent over the quarter. Indeed, the strategy suffering the biggest decline during Q3 was the Janus Henderson Inst Long Dated Gilt fund, which lost 3.57 per cent.
Multi-asset and specialist funds
The stand-out performer again this quarter among the specialist sectors was IA Technology & Telecommunications where the average fund was up by 4.96 per cent. Although this was a lower rise than the previous quarter, it suggests that there remains plenty of support for the high-growth technology stocks that have driven the post-crisis equity bull run.
The best performer from the sector was Robin Geffen’s £45.6m Neptune Global Technology fund, which rose by 10.03 per cent during Q3.
Performance of sectors over Q3 2018
Source: FE Analytics
In the multi-asset space, sectors that favour greater equity exposure – such as the IA Mixed Investment 40-85% Shares and IA Flexible Investment (where funds can hold up to 100 per cent in equities) – were the best performers.