T
he third quarter started o with
economic recovery in the US gaining
further traction – GDP rose by a seasonally
adjusted 4% annualised in the second
quarter of 2014, along with positive job
numbers. JanetYellen did, however, warn
of ‘false dawns’.Although interest rate
hikes seemed to be closer in the UK and
US, the situation in Europe suggested that
a package of quantitative easing (QE) was
imminent. Emerging markets were mixed,
as China underwhelmed and Russia dipped,
but the Philippines and Thailand rallied.
Given the recent weakness in economic data
out of Europe, the European Central Bank
(ECB) announced a surprise rate cut and
trimmed their benchmark interest rate and
cut their rate on bank deposits in the rst
week of September.More importantly, the
ECB will start buying a broad portfolio of
asset-backed securities and covered bonds,
dubbed‘private QE’.These actions should
help channel loans to the real economy.The
market reaction to the ECB was consistent
with previous moves: the euro plunged,
peripheral debt rose and equities rallied.
Markets did not have any strong reaction to
the Scottish‘No’ vote to separation from the
UK on 18 September.
T
he UK economy maintained its growth
momentum going into Q3, although
it experienced a very modest slowdown
inAugust. GDP was con rmed at 0.8%
for Q2, stable on the Q1 result. UK
government bonds performed positively
due to strong economic data and market
expectations of a base rate rise before
year-end; but mainly from action by the
European Central Bank, which introduced
a negative deposit rate and a programme of
targeted long-term re nancing operations.
Conventional gilts of four-year maturity
and above saw yields decline while index-
linked bonds fell right across the yield
curve. In its In ation Report inAugust the
Bank of England (BoE) cut sharply its wage
growth forecasts for 2014 from 2.5% to
1.25% as well as revising down its estimate
for 2015. Financial markets perceived the
In ation Report as being rather dovish
and this, together with some inconsistent
wording from BoE governor Mark Carney
over the summer, led them to push back
their expectations of a rate rise to 2015.
The main UK event of the quarter was the
Scottish independence referendum held on
18 September, which put UK government
bonds and sterling under pressure amid
major uncertainty over the result. In the
event, Scotland voted by a resounding
majority to remain part of the United
Kingdom. Gilts and sterling rallied on
the news and Moody’s a rmed their UK
government bonds rating as Aa1.
Nimish Patel and Eleanor de Freitas
THE INVESTOR CENTRE
THE INVESTOR
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BLACKROCK
Core manager: Global Equity
Mixed emerging markets and surprise
rate cut by European Central Bank
BLACKROCK
Index Linked Gilts
UK momentum maintained as ECB
looks at refinancing operations
The europlunged,
peripheral debt rose
and equities rallied
Scotlandvotedby a
resoundingmajority to
remainpart of theUK
Francis Rayner
U
ncertainty due to geopolitical con icts,
the Scottish referendum, the timing of
interest rate movements in the US, UK and
Europe and weak European growth led the
FTSE 100 Index of the largest companies
to continue to outperform the mid-sized
companies in the FTSE 250 Index.The fund
was a signi cant bene ciary of the positive
earnings news fromNext, Reed Elsevier
and Reckitt Benckiser.These companies
reported sales and margin growth and have
high-quality franchises that are exposed to
areas of growth with high returns on capital
and sensible capital allocation. Our holding
in Shire also rose after the company accepted
a raised bid fromUS pharmaceutical group
AbbVie, while BritishAmericanTobacco
bene ted from renewed corporate activity
within the tobacco industry. Given weakness
in European economic indicators, easyJet
fell, despite encouraging monthly passenger
tra c data, a pledge to increase its dividend
payout as a proportion of pro ts and an
order for additional aircraft.While the
ending of quantitative easing in the US is
likely to induce some volatility in equities
and bonds, we anticipate that in ation
expectations and medium-term GDP
growth will remain modest. In a market
that has re-rated higher over the past couple
of years, our continued focus on holding a
high-conviction portfolio of companies able
to meet or exceed earnings expectations
leaves the fund well placed for the current
market environment.
BLACKROCK
UK & General Progressive
Fund benefited from companies
with high-quality franchises
We anticipate that
in ation expectations
will remainmodest
Luke Chappell
