After a relatively quiet summer, investors returned from their holidays to find markets in more volatile mood. Much of September's market volatility was centred around the uncertainty of central bank action with the Bank of Japan, European Central Bank, Bank of England and US Federal Reserve all meeting to decide on monetary policy in the month.
Central banks are exerting more and more influence on financial markets and market sentiment, and September was another example of this. In the end, all four banks stood pat and made no change to current policy.
Fixed income markets sold off in the month with UK government bonds, or gilts, UK corporate debt and riskier high yield bonds all losing money in the month. At one stage the 10 year gilt yield looked to about to rise back above 1% in the month, but fell back again subsequent to the Bank of England meeting. Investors are now pricing in a further cut to interest rates, to 0.10%, at the November meeting.
In contrast it was a better month for equity markets, with the FTSE All Share rising 1.7% in September. Global equity markets also generated positive returns but the weakness of sterling was a key factor here. Sterling weakened more than 3% against the dollar, for example, and this helped inflate the price of overseas assets.
The best performing part of the market was emerging markets. Emerging market equities, as measured by the MSCI Emerging Market index, rose 2.1% in September and are now up an impressive 31.6% in 2016. Brazil, where we are overweight, has risen 86% since the start of the year. Data continues to show strong inflows into emerging markets after experiencing several years of outflows, and in terms of valuations, it remains the cheapest of the main equity markets on a price-to-earnings basis.
A tailwind for emerging markets has been the strong returns from commodities, with the rebound in oil prices continuing. This in turn helped boost the value of the shares in commodity companies.
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