Issued in October 2015

Schroders

Quarterly markets review

Global equities declined amid worries about the economic slowdown in China and the implications for
global growth. Emerging market equities underperformed developed markets.

The US Federal Reserves decision to defer lift off of interest rates was a key moment in the quarter and
exacerbated the sense of uncertainty in markets.

In the eurozone, the autos sector came under severe pressure after revelations that VW had misled
regulators on emissions from diesel vehicles.

Japanese equities suffered amid weaker-than-expected data for Japans economy. Stocks were further
pressured as the yen saw inflows due to its perceived safe haven status.

Weak Chinese economic data was a drag on emerging markets while Brazil was also a focus as S&P
Ratings downgraded the countrys debt to non-investment grade.

The third quarter was broadly positive for global bonds, as commodity price weakness and fears over
global economic growth led investors to seek out safe havens.

US
US equities performed poorly, in line with global equities, as markets fretted about the extent of the economic
slowdown in China and emerging markets, and what that might mean for global growth. The S&P 500 fell
6.4%.
While the Federal Reserve (Fed) delayed its much-anticipated lift off in interest rates, this was not taken as a
positive signal by investors. Markets instead focused on the comments made by Fed chair Janet Yellen at the
subsequent news conference, where she cited worries about the world economic outlook in explaining the
decision to delay a rate hike. In the currency markets, the US dollar was weaker over the quarter against most
other major currencies, depreciating by 2.2% compared to the yen and 0.3% versus the euro. Against the
pound sterling, however, the dollar was 3.7% stronger.
Amid the risk-off environment the equity markets bond proxies performed well, notably utilities, which was
the only sector to rise. The defensive consumer staples sector also performed relatively well. The resource
sectors continued to weaken, while healthcares strong run came to an abrupt halt, after Democratic Party
presidential hopeful Hillary Clinton attacked pharmaceutical pricing.
On the data front, there were few signs that the consumer-led recovery was slowing down, as the Conference
Board measure of consumer confidence improved to 103.0 in September, back to Januarys high. Secondquarter GDP growth was revised upwards, from 3.7% to 3.9% (annualized).

Eurozone
Eurozone equities registered negative returns as worries over global growth weighed on appetite for risk
assets. These concerns were partly driven by weaker data from China and the authorities moves to devalue
the yuan. Uncertainty over US monetary policy also contributed to the risk-off sentiment, as did a scandal over
emissions from VW diesel vehicles.
The downbeat global mood overshadowed further encouraging data from the eurozone. GDP rose by 0.4%
quarter on quarter in Q2 (revised up from a preliminary reading of 0.3%). The flash composite purchasing
managers index (PMI) for September was 53.9, down from 54.3 in August. The French economy showed
improvement, including consumer sentiment rising to 97 points in September its highest level in nearly eight

Schroders Quarterly markets review

Issued in October 2015

years. However, eurozone inflation remained well below target at just 0.1% in August compared to 0.2% in
July. Elsewhere, the eurozone approved Greeces 86 billion bailout package and the Greek electorate went
to the polls again with left-wing party Syriza emerging as the victor once more.
On the corporate front, all sectors saw negative returns although healthcare and telecommunications held up
better than the rest. Auto stocks were among the worst performers over the period, due in part to expectations
that a slowing Chinese economy would see reduced demand. Further pressure was then heaped on the sector
after revelations that VW had misled regulators in emissions tests on its diesel vehicles. VW set aside 6.5
billion in provisions and the scandal ensured that Germanys Dax was one of the weakest European indices
for the quarter.

UK
The FTSE All-Share declined by 5.7% amid concerns of a deeper-than-feared slowdown in the Chinese
economy and an across-the-board deceleration in emerging markets growth. Emblematic of the pressures
facing the resource companies, the share price of FTSE 100 mining and trading group Glencore fell by almost
two thirds as the market focused on its high level of financial gearing in a weak commodity price environment.
Reflective of the risk-off environment, government bonds performed well with FTSE Groups All Stocks Index,
which tracks UK gilt prices, rallying 3.1%. There was a strong performance from bond proxies too, such as the
utility firms and cigarette companies. Indeed, the stable and defensive companies performed well more
generally, among them Reckitt Benckiser and Unilever. However, merger and acquisition (M&A) activity did
play a part in the consumer staples good performance, as drinks giant SABMiller confirmed an approach from
Anheuser-Busch InBev, while Imperial Tobacco was at the center of break-up speculation.
M&A activity continued to be a theme across the market, with Pearson selling the Financial Times to Japans
Nikkei, generic drug specialist Hikma Pharmaceutical acquiring US peer Roxane Laboratories and Shire
making a hostile bid for drugmaker Baxalta. In addition, US activist hedge fund ValueAct Capital took a stake
in industrial conglomerate Smiths Group, there was a merger agreement between Betfair and bookmarker
Paddy Power, and HSBC announced it is to dispose of its Brazilian unit Bradesco.
Elsewhere, there were notable profit warnings from engineer Rolls-Royce, due to issues at its core civil
aerospace unit, and from industrial valves and actuators manufacturer Rotork. The latter suffered a particularly
weak August, following project cancellations and deferrals, which analysts say were mainly related to its oil
and gas clients. Weir Group, a maker of industrial pumps and actuators, warned on revenues due to a
slowdown in demand from the oil & gas industry. Wolseley, a supplier of plumbing, heating and other building
materials, also warned on revenues following a decline in activity in its North American industrial market,
particularly in the major oil-producing states.

Japan
The Japanese stockmarket came under heavy selling pressure in the third quarter as the benchmark TOPIX
Index fell 12.8%, in yen terms, amidst slowing global growth and weaker-than-expected data for the Japanese
economy. Stocks slid to an eight-month low while the Japanese yen strengthened as the currency saw inflows
based on its perceived safe haven status. August saw the start of a global selloff that engulfed markets while
the delay in an interest rate hike by the US Fed also hit sentiment. Foreign investors were significant sellers in
the Japanese market over the period. Heightened levels of uncertainty also led to a sharp strengthening of the
yen against major currencies, reversing most of the weakness seen year-to-date.
Locally, the corporate results season was solid and beat consensus expectations but on the data front, the
numbers remained mixed. Core inflation fell for the first time in over two years, entering deflationary territory in
August, and increased the pressure on the Bank of Japan to further ease monetary policy. However, labor
market conditions remained on the right track. Weakening economic sentiment also led to a questioning of the
merits of Abenomics and the market now seems preoccupied with the potential setback to corporate earnings
prospects going into next year.

Asia (ex Japan)

Schroders Quarterly markets review

Issued in October 2015

governments willingness to support the stockmarket. A devaluation of the yuan by the Peoples Bank of China
(PBoC) in early August, via the currencys daily fixing rate, also hit sentiment. The closely-watched Caixin
China manufacturing PMI reading for August plumbed a six-year low of 47.3 while the PBoC also cut interest
and reserve requirement ratio rates in an attempt to support growth.
Meanwhile, Hong Kong stocks fell sharply on weaker China data as well as a slowdown in its local economy,
given lower Chinese consumer spending. Taiwanese equities declined, led by its large technology sector, on
worries over slowing global growth while Korea, a fellow export-oriented economy, saw its market fall on the
back of a weaker Korean won and soft trade data.
In ASEAN, all markets declined, with Thailand and the Philippines falling on growth concerns. Indonesian
stocks suffered the most as its currency hit a multi-year low amidst disappointing growth data. Although Indian
stocks also declined, they were the regions best performer as the economy continues to show signs of a pickup in growth while a larger-than-expected interest rate cut late in the period helped to support the market.

Emerging markets
Emerging markets registered a sharp decline as US rate hike uncertainty, concerns over the health of the
Chinese economy, political risk and commodity price weakness all contributed to risk aversion. The MSCI
Emerging Markets (EM) index underperformed MSCI World. In emerging EMEA, South Africa was down
sharply and underperformed with rising expectations for a tightening in global liquidity acting as a headwind for
the market. Turkey also lagged. Coalition negotiations, following indecisive elections, failed and fresh elections
will take place in November. Meanwhile, the government joined US-led attacks on IS in Syria and Iraq, but
also cracked down on the Kurdistan Workers Party (PKK), leading the group to end its ceasefire with the
government. Greece was the weakest index country. Although a third bailout deal was agreed, the imposition
of capital controls means banks are now expected to require a sizeable recapitalization.
In emerging Asia, India held up best. Q2 GDP growth eased to 7% year on year but economic data generally
remained constructive. In September, the central bank then cut rates more than anticipated to 6.75%, after
inflation eased to 3.7%. Amid some high volatility, particularly in July, China lagged. Macro data continued to
weaken and the authorities cut the main interest rate and lowered bank reserve ratio requirements. The
central bank also altered the way it fixes the renminbi, to be more market driven, raising wider concerns on the
health of the economy and sparking uncertainty over future policy responses. Indonesia underperformed with
currency weakness magnifying negative returns. The country has a high current account deficit and the market
was negatively impacted by expectations of an interest rate hike from the Fed.
Latin America was the worst performing region with commodity price declines having a negative impact on
several markets. Currency weakness across the region amplified losses. Colombian equities were impacted
by lower oil prices and the peso was down 16.6%. Brazil recorded the steepest decline as the macro outlook
deteriorated and the government went back on a commitment to a primary surplus in 2016, prompting a credit
rating downgrade to junk status.

Global bonds
The third quarter of 2015 was broadly positive for global bonds, as commodity price weakness and fears over
global economic growth led investors to seek out perceived safe havens. Amid the uncertainty,
accommodation in monetary policy remained high or increased. In August, additional easing measures were
introduced by the Chinese central bank. In September, the Fed announced its headline policy rate would not
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rise. Global government bond yields were almost universally lower in Q3. Investment grade corporate bonds
inched into positive territory, although high yield bonds struggled.
The 10-year Treasury yield fell from 2.35% to 2.04% in Q3. The 10-year gilt yield fell from 2.02% to 1.76%, as
the equivalent Bund yield declined from 0.76% to 0.59%. In peripheral Europe, government bond yields fell
more steeply. The Italian 10-year yield fell from 2.33% to 1.73% and the Spanish 10-year yield fell from 2.31%
to 1.89%.

Investment grade bonds are the highest quality bonds as determined by a credit ratings agency. High yield bonds are more speculative,
with a credit rating below investment grade.
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Schroders Quarterly markets review

Issued in October 2015

In corporate bond markets, the investment grade BofA Global Corporate Index generated a total return of
0.25%, outperforming the high yield index which declined -4.51% (both in local currency). Sterling
denominated bonds were the strongest performers among major investment grade indices in the quarter,
followed by the dollar investment grade corporate bond index. Euro denominated equivalents produced
negative total returns. In high yield indices, dollar denominated bonds were substantially weaker than either of
the euro or sterling equivalents, though all were negative on a total returns basis.

Overview: total returns (%) to end of Q3 2015

12 months

Equities

EUR

USD

GBP

EUR

USD

MSCI World

-8.50

-8.33

-4.83

8.00

-4.57

2.13

MSCI World Value

-9.29

-9.12

-5.65

3.37

-8.66

-2.25

MSCI World Growth

-7.73

-7.56

-4.02

12.68

-0.43

6.56

MSCI World Smaller Companies

-9.82

-9.65

-6.19

11.65

-1.34

5.59

MSCI Emerging Markets

-17.93

-17.78

-14.64

8.32

-18.98

-13.29

MSCI AC Asia ex Japan

-17.09

-16.94

-13.76

-0.58

-12.15

-5.98

S&P500

-6.61

-6.44

-2.86

12.47

-0.61

6.37

MSCI EMU

-8.53

-8.36

-4.85

3.66

-8.40

-1.96

FTSE Europe ex UK

-8.29

-8.12

-4.60

4.46

-7.69

-1.21

FTSE All-Share

-9.34

-9.18

-5.70

3.31

-8.71

-2.30

TOPIX*

-11.05

-10.89

-7.48

12.38

-0.69

6.28

3 months

GBP

12 months

Government bonds
JPM GBI US All Mats

EUR
1.76

USD
1.95

GBP
5.85

EUR
17.88

USD
4.17

GBP
11.48

JPM GBI UK All Mats

-0.65

-0.47

3.34

JPM GBI Japan All Mats**

2.87

3.06

7.00

15.01

1.63

8.77

6.32

-6.05

0.54

JPM GBI Germany All Mats

1.83

2.02

5.92

3.61

-8.45

-2.02

Corporate bonds
BofA ML Global Broad Market Corporate

EUR
-0.41

USD
-0.23

GBP
3.59

EUR
9.67

USD
-3.09

GBP
3.71

BofA ML US Corporate Master

0.20

0.39

4.23

14.70

1.36

8.48

BofA ML EMU Corporate ex T1 (5-10Y)

-0.29

-0.10

3.72

-0.25

-11.86

-5.66

BofA ML Non-Gilts
Non-investment grade bonds
BofA ML Global High Yield

-2.92
EUR
-4.82

-2.74
USD
-4.64

0.98
GBP
-1.00

10.57
EUR
7.21

-2.29
USD
-5.27

4.57
GBP
1.39

BofA ML Euro High Yield

-2.28

-2.10

1.65

0.18

-11.48

-5.26

Source: DataStream. Local currency returns in Q3 2015: *-12.78%, **0.87%. Past performance is not a guide to future
performance and may not be repeated. The value of investments and the income from them may go down as well as up
and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any
overseas investments to rise or fall.

Schroders Quarterly markets review

Issued in October 2015

Important Information:
The views and opinions contained herein are those of Keith Wade, Chief Economist and Strategist, Azad Zangana, European
Economist and Craig Botham, Emerging Markets Economist, and do not necessarily represent Schroder Investment
Management North America Inc.s house view. This newsletter is intended to be for information purposes only and it is not intended as
promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial
instrument mentioned in this commentary. The material is not intended to provide, and should not be relied on for accounting, legal or tax
advice, or investment recommendations. Information herein has been obtained from sources we believe to be reliable but Schroder
Investment Management North America Inc. (SIMNA) does not warrant its completeness or accuracy. No responsibility can be accepted
for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking
individual investment and / or strategic decisions. Past performance is no guarantee of future results. Sectors/regions mentioned are for
illustrative purposes only and should not be viewed as a recommendation to buy/sell. The information and opinions contained in this
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