Market update and investment risks

The following reflects the general views of M&GPrudential Treasury & Investment Office (T&IO), which includes the team formerly known as Prudential Portfolio Management Group and should not be taken as recommendation or advice as how any specific market is likely to perform.

These views are as at the end of March 2019.

The value of investments can go down as well as up. Investors could get back less than they put in.

Please remember that past performance is not a reliable indication of the future performance.

Overview

Worries about faltering global economic growth preoccupied investors during the quarter. In the US, job creation came to a near halt, with nonfarm payrolls for the month of February recording its weakest gain in more than a year and the economic growth rate slowing in the final quarter of 2018. Meanwhile, weak Chinese export data provided evidence that the trade dispute with the US has been hurting China. In Europe, manufacturing activity across the eurozone was the worst in five years. It appears central banks are doing their best to respond to rapidly worsening outlook for global growth. The US Federal Reserve kept rates on hold in March and signalled no rises for the rest of 2019 and the European Central Bank indicated that interest rates would stay at record lows for longer.    

Equities (or shares)

UK stockmarkets rallied strongly, with investor sentiment boosted by confirmation that US interest rates were unlikely to rise again this year, as well as signs of progress in US-China trade talks. Later in the quarter, concern about a slowing global economy prompted some moderate selling. The UK had to deal with its own problem of Brexit, which triggered volatility in share prices, which were rising when a ‘soft’ exit, or a delay, seemed more likely and falling when a ‘no-deal’ exit appeared possible. In the end, the UK did not leave on March 29, as had been planned. Sterling strength meant that the domestically-focused FTSE 250 outperformed the more export-oriented FTSE 100, although the gap narrowed in March.

What do you mean by Equities?

  • Equities are commonly known as "shares". When a fund buys a company share, it is investing in a company and, in exchange, receives a share of the ownership of that company. Shares give two potential investment benefits:
    • share prices may increase as the value of the company increases.
    • companies may pay dividends - regular payments made to shareholders based on how well the company is doing.

What are the general risks of this type of asset?

  • Over the longer-term (over 10 years), equities are considered to offer greater growth potential than many other asset types. However, the value of any investment can go down as well as up and so there is a higher risk of losing your original capital than investing in fixed interest securities (see below).
  • The financial results of other companies and general stock market and economic conditions can all affect a company's share price, and consequently the value of any fund investing in that company.

Fixed interest

UK government bonds (gilts) delivered solid returns in the first quarter of 2019 as dovish signals from the world’s central banks, against a backdrop of slowing global growth, helped support demand for traditional safe haven assets. The US Federal Reserve now appears to have ruled out any further rate hike this year, while the European Central Bank President Mario Draghi also stated that lending rates would not be increased if data continued to deteriorate. Gilts additionally benefited from ongoing Brexit uncertainty, with 10-year yields briefly dipping below 1% in March. UK corporate bonds also performed well over the period, as the general improvement in investor sentiment helped boost returns.

What do you mean by Fixed Interest?

  • Fixed interest securities, more commonly known as "bonds", are loans issued by companies or by governments in order to raise money.
  • Bonds issued by companies are called Corporate Bonds, those issued by the UK government are often called Gilts or UK Government bonds and those issued by the US government are called Treasury Bonds.
  • In effect, all bonds are IOUs that promise to pay you a sum on a specified date and pay a fixed rate of interest along the way.
  • Index-linked securities are similar but the interest payments and redemption value are normally increased by a price index e.g. for UK government index-linked securities, interest payments and redemption value are increased in line with the UK Retail Price Index.

What are the general risks of this type of asset

  • On the whole, investing in Government or Corporate Bonds is seen as lower-risk than investing in equities. To date, no UK government has ever failed to pay back money owed to investors. But with Corporate Bonds there is a risk that the company may not be able to repay its loan or that it may default on its interest payments.
  • Corporate and Government bonds are sensitive to interest rate trends. An increase in interest rates is likely to reduce their value, and hence the value of any fund investing in them.

Property

UK commercial property got off to a subdued start in 2019, a stark contrast to the previous year, when the market recorded a total return of 6.3%, according to property consultant CBRE. So far this year (up to the end of February, the latest date for which data is available), capital values have fallen in the Retail sector - reflecting the trend experienced throughout 2018. Conversely, values have continued to rise in the Office and Industrials sectors. But despite weakness in Retail, including income, All UK property recorded a small positive total return for the first two months of the year. Looking ahead, we expect UK commercial property to generate low-single-digit returns over the next five years, with rental income representing a significant proportion of returns. Both domestic and overseas investors remain keen on UK commercial property, tempted by its attractive yield and despite the UK’s political challenges.

What do you mean by Property?

  • For our funds we would mean commercial property investment. This generally means the fund is sharing in the returns from the ownership of some buildings (for example, offices and shopping centres).
  • The value of the property may increase and tenants may pay rent to the owners of the building.

What are the general risks of this type of asset

  • Property can be difficult to buy and sell quickly. Fund managers may have to delay withdrawal of money by customers from a property fund until they can sell some of the buildings the fund invests in.
  • The actual value of a property is what someone is prepared to pay for it - an actual sale value. As sales are infrequent, interim valuations are based on a valuer's opinion and may be revised up or down from time to time. This can affect the value of a fund invested in commercial property, with the value possibly fluctuating significantly and could result in an investor not getting back the amount they originally invested.
  • This leads to a number of risks for funds investing in property:
    • Cash could remain uninvested as property assets can be difficult to buy, leading to lower returns than expected.
    • The value of the fund may be reduced if a large number of withdrawals are requested and it is necessary for properties to be sold at reduced prices.
    • There may be delays removing your money from the fund if property cannot be sold.
    • Property fund valuations may be revised periodically, upwards or downwards.
    • Rental income is not guaranteed. Defaulted rent and unoccupied properties could reduce returns.
    • If the size of the fund falls significantly, the fund may have to hold fewer properties, and this reduced diversification may lead to an increase in risk.

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