Balanced Portfolios Q3 2018 Commentary

Asset classes
Equities, Fixed Income, Non Traditional
Instruments
ETFs
Investment styleMacro strategic and diversified exposure
Quarterly Return (net of fees)
 
Conservative  
+0.3%
 Moderate +1.7%
Aggressive    +2.4%

 

Market overview

As volatility returned to the global financial markets in the first quarter of 2018, and peaked at the sell-off in February, most asset classes produced negative returns. Equities recovered somewhat throughout the second quarter, and continued to do so in the third. This was particularly the case for the developed markets. However, elevated levels of volatility continued to characterize the markets due to factors such as geopolitical tensions, tightening financial conditions, rising macro uncertainty, among others.

Global equities have been seesawing but ended the first half of this year with a modest gain. Continued positive performance in the third quarter was driven by a booming US economy. Most notable here were key data points such as consumer confidence that reached a level not seen since 2000. Wages growing at a rate last seen in 2009 as well as overall strong business confidence. In Q3, we saw the strongest performance in developed equities – which was led once again by the US and followed by Japan. Despite the influence of geopolitical tensions, global emerging markets closed the quarter almost flat. Europe showed positive performance whilst the UK were negatively impacted by fears of a no deal Brexit.

Fixed income dynamics have changed somewhat, as there was a clear preference for riskier assets. For example, US High Yield continued to post the strongest returns. EM hard currency debt rebounded after a strong sell off in the first half of the 2018. European High Yield and Global Investment Grade both posted positive returns. Unsurprisingly, US and European Government debt continued to suffer on the back of tightening monetary policy in these two regions.

 

Portfolio performance

Returns net of feesConservative  Moderate Aggressive
July +0.4% 1.2%+1.5%
August
 –0.1% 0.3% +0.6%
September 
 +0.1% 0.2%+0.3%

The risk profiles all produced positive returns in the third quarter, lifted mainly by developed equities. 

The positive performance of the equity allocations was predominantly driven by US equities (including Value and Minimum volatility) as well as Japanese equities, while emerging market equities detracted slightly over the course of the quarter. 

The fixed income sleeve overall detracted from performance, led by European and German government bonds.

Within the non-traditional sleeve we see mixed performance. While global infrastructure equities added to the overall performance for the quarter, developed market property was flat and commodities detracted.

Outlook

BlackRock sees the steady global expansion continuing, driven by above-trend U.S. growth. Yet the range of potential economic outcomes is widening. Surprise events fueled by stimulus and productivity gains could boost growth and risk assets, whereas escalating trade disputes and rising price pressures could create downside risks. Gradual increases in U.S. rates are tightening financial conditions globally, and have contributed to periods of volatility and sharply depreciating EM currencies. To BlackRock, this argues for a greater focus on making portfolios more resilient to downside shocks. 

Emerging markets have been hit by a series of country-specific shocks and tightening financial conditions putting pressure on those with the greatest external vulnerabilities. BlackRock see room for a recovery, especially in equities. China’s economy appears resilient, EM fundamentals are generally robust, and may be near a peak in idiosyncratic risks. Valuations reflect much potential downside. The Federal Reserve is set to keep raising rates gradually and could start to slow its balance sheet wind-down next year. Risks include escalating trade frictions, hefty portfolio outflows, and a hawkish Fed pushing up global rates and the U.S. dollar. 

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