Ethical (ESG) Portfolio

Seven months of dearer money

Every major central bank tightened in the third quarter: the Federal Reserve for the first time since 2023, the ECB alongside it, and the Bank of Japan at its fastest pace since 1990. US Treasuries fell 3.2% over the quarter, and euro-area sovereigns 4.4%. Equities held on, narrowly: the S&P 500 made a new high on 6 October, with 40% of its members lower than in March. US inflation has risen to 3.7%. As we said last month, the risk lies in borrowing, not in share prices.

Oil, gilts and the Budget

With Hormuz still contested, Brent ended the quarter at $103.53, and the six-month forward price is at a record. The market is pricing a prolonged disruption, not a spike. In the UK, this comes a fortnight before the 28 October Budget. Borrowing is £8.1bn above the OBR’s profile, and the 10-year gilt reached 5.44% on 7 October, a 19-year high, with markets pricing a Bank Rate rise from 3.75% to 4.75% by next summer.

We think much of the alarm is misplaced

The UK was the fastest-growing G7 economy in the first half; 10-year gilt yields are two percentage points above inflation and barely one above their average since 1711; and some analysts expect just one more hike, followed by cuts. Yet 48% of fund managers remain underweight in bonds: we believe the crowd is on the wrong side.

SCM Direct/MoneyShe Portfolios: what we changed, and why

On 17 September, we made two like-for-like switches. iShares MSCI EM SRI went into iShares MSCI EM CTB Enhanced ESG, which tracks a climate-transition benchmark and is cheaper and better spread: 13.7 times earnings against 16.6, with its ten largest holdings 37% of the fund rather than 45%, which matters when Korea can fall 7% in a day, as it did on 15 October. HSBC Japan Screened Equity went into UBS MSCI Japan Socially Responsible, moving to MSCI’s stricter SRI low-carbon screen.

We also trimmed Japan from 7% to 4% after its strong run this year, reduced Europe by 1.7 points, and added 2.2 points to the Invesco FTSE All Share Screened & Tilted ETF, where the FTSE 100 trades at 14.2 times earnings with a 3.1% dividend yield, against 23.3 times and 1.1% for the S&P 500, and 2.5 points to the Invesco GBP Corporate Bond Screened & Tilted ETF, with sterling investment-grade yields above 6%. Equity exposure falls from 60% to 57.5%. The direction is the same across all our portfolios: more UK, more income, less momentum.