The iShares UK Equity Fund returned 1.8% over the quarter - but while the UK was one of the best performers in July, it gave back some of these gains in September as expectations of interest rate hikes weighed on the market.
European shares delivered more modest returns over the quarter. While the economy grew faster than expected, there are stillconcerns about inflation. Europe imports much of its energy so is affected by rising oil prices. The SSGA European Equity Fund dropped 1.6% over the period.
Japan was among the strongest markets in the quarter and the SSGA Japan Equity Fund returned 5.7%. Good company results were underpinned by ongoing efforts by banks and tech companies to improve corporate governance (how companies are run). The Bank of Japan raised interest rates to 1.25% but reassured investors that any further increases would be gradual.
Bonds: Repriced and Repositioned
It was a challenging quarter for bonds, with most parts of the market delivering negative returns. This was largely due to concerns that sticky inflation will mean interest rates remain higher for longer. Another factor is that governments are issuing more debt, which means issuing more bonds, to fund their spending.
UK government bonds (known as Gilts) are often considered something of a safe haven, but fell in value amid concerns about government borrowing and high inflation. By the end of September, the UK government was paying its highest level of interest to borrow for almost 30 years.
When rates are rising, the fixed coupon paid by bonds already in issue looks less attractive against bonds being newly issued with a higher coupon. This causes the yield of the bonds to rise and the price of the bonds to fall.
Against that backdrop, it is unsurprising that government bonds were among the weakest performers. The SSGA Global Treasury Bond Fund (GBP Hedged) dropped2.3% while the SSGA Global Aggregate Bond Fund (GBP Hedged), which includes corporate bonds (those issued by companies), went down 2.6%. Emerging markets were weaker still, with the JPM Emerging Markets Aggregate Bond Fund also saw a reduction of 3.0%.
Other assets
Rising interest rates have also hurt infrastructure and property investments, as borrowing for their projects becomes more expensive and the income they produce looks less attractive compared with bonds.
The ATLAS Global Infrastructure Fund returned saw a big pull back of 8.4% in GBP, as its UK and European holdings, and particularly utility companies and airports, were affected by higher borrowing costs. The LGIM Global Real Estate Fund dropped 6.6%. Importantly, the performance for both remains positive over the year to date, with Atlas up 8% and LGIM 3.6%.
Gold, which typically performs strongly at times of uncertainty, had a mixed quarter. While the precious metal rose strongly in August, it fell by 6.5% in September. Rising interest rates and a stronger US dollar reduce the appeal of the metal. The iShares Physical Gold ETC returned 3.6%.
