Q3 best performing markets, funds and shares

• Indian summer dominates the fund performance tables
• Oil and aerospace are back in fashion
• Gilt funds sell off
• Most popular funds, shares and trusts with DIY investors

Laith Khalaf, head of investment analysis, AJ Bell:

“It’s been a positive summer for most markets, though the vaccine momentum of the first part of the year has waned, as concerns over inflationary pressures and tighter monetary policy have surfaced. Investors are now looking forward twelve months into 2022, where growth will become more arithmetically challenging, as the global economy starts to lap a period when it was already firing on all cylinders.

“The winter therefore looks set to deliver a more nuanced picture for investors than the vaccine-driven animal spirits we saw at the end of last year. Inflation will remain elevated and that will begin to test the nerve of central banks. November looks like a crunch month, where central bank meetings on both sides of the Atlantic could fire the starting gun for the tightening cycle. Some expectation of tighter monetary policy has already been baked into prices, with both bond yields rising, and the valuations of some growth stocks getting clipped back from lofty levels.

“Equity investors can afford to take a long term view and console themselves with the fact that if central banks feel confident enough to hike rates, that will mean the economy is in fine fettle, and companies should be delivering earnings growth. Bond investors might legitimately be a little more perturbed by monetary tightening however, particularly those invested in longer dated government bonds. They’ve had an exceptional run since QE was introduced after the financial crisis, but the screw may be beginning to turn in the opposite direction. Bonds still act as a diversifier against an equity portfolio, to provide some ballast in case the global economy stutters. But right now, the yield provided by conventional gilts looks scant compensation for the risk of higher interest rates, and inflation.”

Major markets

“2021 has been a positive year for equity markets so far, and while most still posted positive returns in the third quarter, the pace of growth has slowed. The exception is the Japanese stock market, which experienced a late summer surge. The Nikkei 225 reached a 31 year high in September, following the Prime Minister’s resignation. It’s galling enough for Chief Execs to see their company’s share price rise when they announce they’re moving on, so spare a thought for Yoshihide Suga, who saw the whole Tokyo stock exchange cheering his departure.”

Source: AJ Bell, Morningstar total return in GBP to 30th Sep 2021

Funds and sectors

“Outside of major indices, the Indian stock market has been on a summer charge, and that’s reflected in the best performing funds of the quarter, and indeed the year. Japan too features near the top of the table, with commodity funds and smaller companies funds also registering their mark.

“At the bottom of the table, it’s been a year to forget for Chinese equity investors, following government clampdowns on tech and education sectors, and by the recent liquidity crisis at Evergrande. The UK gilt sector also finds itself at the bottom of the performance table since the beginning of the year, as we have gone from preparing for negative interest rates to expectations of tighter policy.”

Source: AJ Bell, Morningstar total return in GBP to 30th Sep 2021

Source: AJ Bell, FE total return in GBP to 30^th Sep 2021

Shares

“Within the FTSE 100, it’s aerospace stocks flying high in the latest quarter, but the real performance story of 2021 in the UK stock market is takeovers, with Entain, Meggitt and Morrison all seeing enormous share price rises after US buyers swooped in with compelling offers. The oil majors have also had a good year with the oil price now over $80 a barrel, up from around $50 at the start of the year.

“At the bottom of the quarterly performance table is Royal Mail, which has seen its shares shed a quarter of their value in three months. Some of this is likely profit taking, following the huge surge in the share price seen over the course of the pandemic, with more parcels whizzing around the country serving Royal Mail well. However, the potential for supply chain bottlenecks and labour shortages have also taken their toll on the share price of late, unsurprising given Royal Mail’s heavily unionised workforce.

“Another lockdown winner turned loser is Ocado, where a return to regular shopping habits has undermined demand for the digital grocer’s shares. More concerningly for long term investors, a second warehouse fire will unsettle the international market for its order picking technology, which is the key reason its shares are so loftily valued.”

Source: AJ Bell, Sharepad, price return plus cash dividends to 30^th Sep 2021

Most popular funds and shares with DIY investors

“The table below shows the most popular purchases with DIY investors on the AJ Bell Youinvest platform over the three months to 30^th September 2021. The behemoths Fundsmith Equity and Scottish Mortgage still sit atop the table, despite recently not delivering the blockbuster outperformance investors have become accustomed to. Passive funds and ETFs also feature heavily in the most purchased funds of the summer, perhaps reflecting an uncertain outlook which requires high levels of diversification. Two sustainable funds make it into the top ten, and at an industry level, there are still large ongoing inflows into ESG funds. With COP 26 about to kick off in Glasgow, it looks likely to be another record-breaking year for ethical fund sales.

“Share investors have largely focused on cyclical areas of the market, which also offer attractive dividends too. Dividend yield is often a key consideration for DIY investors, some of whom will be drawing an income from their SIPPs and ISAs. Unilever also proved popular despite a year in which the stock market more broadly has turned against its former darling. DIY investors have clearly seen the sell off as an opportunity to buy into what they see as a robust growth business at a reasonable price.”

Source: AJ Bell Youinvest