A positive quarter for both risky and safe assets

The positive trend which characterised markets since the start of the year held up during the third quarter. The last three months were essentially a repeat of quarter two, where equity markets, when measured in Euro terms, were generally lower mid-quarter and higher in the opening and closing months. Political tensions, the US-China trade war and Brexit were high on the agenda. All these in addition to the central banks’ monetary policy decisions.  In the end, the future expectations of equity investors outweighed the political noise and hence why both equity and bond markets are once again flirting with record high levels.

Sovereign bonds and credit gained, as most central bankers pledged to remain accommodative, even though some investors did expect more easing and a softer tone of voice from central banks. Equities were positive with the exception of August when risk aversion took center stage.

The dilemma of rising equity prices and lower sovereign bond yields intensified as more international government bonds slipped in negative yield territory. The latter is a situation where if a bond is held till maturity the investor will surely record a loss. Locally, all Treasury Bills and all Malta Government Stocks (MGS) maturing in the next seven years are all trading with negative yields.

Sovereign and Investment Grade Bonds

High quality sovereign bonds gained with risky assets. Both the US Federal Reserve (FED) and the European Central Bank (ECB) cut short-term rates. The former justified the rate cut on the back of a slowing global economy while the ECB reduced its short-term deposit rate to negative 50 basis points. In other words, financial institutions should pay to park cash at the ECB. The Eurozone has been in this negative rate environment for the past five years, yet ultra-low interest rates had little impact on the real economy, as some countries remain plagued with dismal economic figures.

The Barclays Euro Government All Maturities Index gained 3.8% during the last three months as money poured in sovereign debt during July and August. In fact the bulk of the gains took place during August when equity markets sold off, and investors sought shelter in safe assets. The index witnessed a 40 basis point pull back during September as investors favoured riskier assets once again.

During the quarter, Germany issued negative-yielding 30-year bonds. Yields on same maturity bonds in the US and UK traded at record lows. Moreover, the US yield curve inverted between two and 10-year Treasury yields. In other words, yields on two year bonds were higher compared to longer-dated 10-year Treasuries. In normal times, the opposite prevails. This was the first time in 13 years.

European Investment Grade bonds underperformed European sovereign debt as the former gained 1.2% during the third quarter. Since the beginning of the year, highly-rated European corporate bonds gained 6.7%.

High Yield Bonds

Going down the quality ladder, European High Yield bonds gained 1.7% as the asset class managed to close all three months in the green. High Yield bonds have constantly exhibited strong correlation to equities, yet the asset class still closed August in positive territory despite the sell-off in equities. Global growth fears and political tensions did little to scare income seeking investors from the asset class. On the other side of the continent, in Euro terms, USD High Yield bonds posted another strong quarter with a 5.7% gain to take the year-to-date gain to 17.2%.

Global Equities

Broad developed market equity indices were generally higher during the quarter with many indices following the same path. That is, they kicked off the quarter in the green, sold off in August and closed the third month on a high as central bankers cut rates even further.

In mid-August an inverted yield curve sounded alarm bells about economic growth and sent global equities lower in the process. Political instability in Italy and Spain weighted heavily on European equity markets while ongoing Brexit issues did not make the situation any better. The US-China trade war reached new heights, as the US announced new tariffs on Chinese goods. In retaliation, Chinese policymakers replied with a currency devaluation against the US Dollar.

Eventually September saw a nice recovery across developed equity markets with various sectors performing strongly. On a sector basis, European utilities gained 8.3%, real estate recorded a 7% gain and health care jumped by 6%. In the US both utilities and real estate topped the list of gainers followed by consumer staples.

Local Markets

The Malta Stock Exchange Total Return Index added another 2.3% during the period under review. As a result, since the beginning of the year, local equities gained 11.2%. RS2 Software plc shares gained 22.4%, PG plc rose 15.4% while Simonds Farsons Cisk plc closed with an 11% gain. Among the large caps, HSBC Bank Malta plc shares shed 11.2%, GO plc declined by 4.4% while Bank of Valletta plc lost 2%.

In terms of MGS, we have witnessed the issuance of the first local sovereign bond with a negative yield. In terms of secondary market activity, bond prices on long-dated issues were significantly higher. The long-dated 2.4% MGS 2041 posted a 16.8% gain throughout the third quarter. The broad MGS index as measured by the MSE MGS Total Return Index gained nearly 5%.

On the other hand, the Malta Corporate Bonds Total Return Index gained 30 basis points.


Throughout the three month period ending September, the Euro was under selling pressure as the single currency lost 1% against the Pound notwithstanding the political uncertainties surrounding the UK economy. In addition, the US Dollar gained a whopping 4.2% against the Euro, as the ECB cut short-term rates further in negative territory.

What’s in store?

Interest rate cuts and stimulus measures should boost global growth. However, geopolitical tensions are here to stay. While staying mindful of risks, long-term investors should not let political noise derail their investment objective. In addition long investors, should understand that higher returns come at the expense of higher risks. As long as your risk tolerance matches your diversified portfolio’s risk profile, do not let news headlines keep you up at night.


Gabriel Mansueto is Head of Investment Advisors at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]