Global equities made good progress over the third quarter of 2018, rising by 5% in £ terms. US equities once again led the way. The S&P500 Index rose by 7.2% bringing the gain over 2018 to date to 9%. These excellent returns, driven by good second quarter corporate earnings and the ongoing impact of last year's tax cuts, were overshadowed by performance elsewhere in the world. In local currency terms, UK equities fell by 1.8% over the quarter whilst European equities lost 0.1%. Emerging markets were especially weak. The latest arguments over US trade tariffs, this time with Turkey, spilt over into currency markets and focussed attention on the financial arrangements of several fragile economies, especially Argentina and Venezuela. Argentina is a perennial defaulter and one wonders just how many times history will repeat itself before bond investors finally get the message. In Venezuela, inflation is now forecast to reach 1 million percent by the end of 2018 with potentially disastrous long term economic and humanitarian consequences.

Contagion from the latest emerging markets crisis affected several other countries, and not just those with too much US Dollar debt. This included South Africa, whose position was not helped by criticism of land ownership issues from the US administration. Although the remarks were brushed aside and whilst South Africa's financial position is not as vulnerable as others, heavy overseas trade in the active Rand market exaggerated the news and contributed to serious price volatility.

The pain felt by emerging markets has been worsened by the underlying strength of the Dollar. In part, this strength has been driven by the very best of reasons: good US economic growth. This has supported the Federal Reserve Bank's policy of 'normalising' interest rates and the Fed has continued to gradually tighten rates to their current level of 2.25%. The Fed's own 'Dot Plot' predictions suggest further rate hikes in 2018, peaking at 3.5% in 2020.

Although not in emerging market territory, sterling has also come under pressure this year. Thanks to Brexit, political cracks have split the ranks of the ruling Conservative party. A deal over Brexit must be struck very soon, but the EU is clearly worried that any sign of weakness on their part will encourage other nations, such as Italy, to do something similar. In practice, Italy's own financial position is amongst the weakest in Europe, so it has little bargaining power. We think that some deal will, however, be struck later this year although Prime Minister Theresa May will struggle to convince Parliament that she has done enough to defend the UK's interests. Failure to do so will almost certainly lead to a leadership challenge and maybe even a general election. Sterling is technically undervalued but, short term, it could move decisively in either direction.

Other uncertainties lie ahead. In the US, mid-term elections may well prise the balance of power away from the Republicans. A Democrat-led Senate would leave many of Trump's policies in limbo and could even lead to impeachment. Markets are worn down by politics, however, and distractions on Capitol Hill are unlikely to derail the bull market. Of more significance will be the earnings results moving into Q3. With the S&P 500 Index close to 20x historic earnings, there is little room for disappointment. So far, the premium which the US market enjoys over Europe and the UK has been vindicated, but for how long?

Within the Marriott International Growth Fund, we have been trimming exposure to certain sectors which have seen good returns in the past but may be threatened by new technologies. This includes the tobacco sector which looks vulnerable to the growth of lower margin, new technology products from the likes of Juul. We also sold the holding in the UK telecoms company Vodafone where we considered that the dividend might be under threat from escalating capital costs associated with new infrastructure and licencing costs.

On the other hand, we have been investing in the paper and packaging company Smurfit Kappa Group which looks set to continue to grow market share as the e-commerce revolution continues to gather momentum and the need for paper wrapping grows. Smurfit recycles around 75% of its packaging and scores well in environmental surveys, something which is becoming increasingly relevant to long term investors. We have also been purchasing shares in the global semiconductor specialist Texas Instruments which produces analogue and embedded microprocessors (i.e. those used in watches, cameras and other household goods such as washing machines) and operates in more than 30 countries worldwide.

In the property component of the portfolio, we sold the Fund's holding in the UK retail property company Hammerson and replaced it with a high yielding UK logistics REIT managed by Tritax Big Box. The rationale for the switch was the ongoing weakness in the UK retail market and the subsequent strength in the warehouse/logistics market which is benefitting from the rapid growth in e-commerce. Consequently, demand for physical shops continues to fall whilst warehouses benefit from the shift to online retailing, a trend which is unlikely to slow down any time soon.