Banana-skins come and go, but the VIX tells its own story
Geopolitical concerns, aggressive posturing by nuclear states and weaker US and UK consumer data all combined to push equities lower during the month. Markets were around 3% off going into Easter but closed off their worst levels, with most ending 1-2% lower. Europe was the exception, rallying hard after the French election's first round put Macron, a Euro-enthusiast, through to face Le Pen. The VIX fear index fell to its lowest level since February 2007, suggesting investors had little fear of an impending upset.
Risk-off into Easter, then a French-election rally
A build-up in geopolitical concerns, together with some weaker economic data, caused investors to take some risk off the table. Stock markets fell whilst fixed interest and gold found favour as safe havens. Markets were around 3% lower going into Easter but closed the month off the worst levels. Europe rallied hard to finish slightly positive after the first round of French elections, but most markets ended 1-2% lower. UK fixed interest showed gains of around 1%, property slightly less.
Europe led stock markets off the lows on relief that the final round in the French elections would see a Macron versus Le Pen contest, one which Macron, a Euro-enthusiast, was expected to win comfortably. The Euro rallied against other currencies and French and peripheral European bonds outperformed others on the belief that the Eurozone would remain intact.
US growth slumps to 0.7% as Europe overtakes the UK
Economic data remained mixed. The worst level of personal consumption since 2009 cut Q1 growth in the US to an annualised rate of just 0.7%, with a similar story in the UK prompting talk of an end to the consumer boom. Bremoaners were allowed their moment of schadenfreude as European growth usurped the UK: Q1 GDP of 0.5% compared favourably with the UK's 0.3%, and Purchasing Managers' data suggested a current growth rate of 0.7% with economic confidence hitting a six-year high.
Central bankers were less prominent, with no major moves and "steady as she goes" type statements. The US Federal Reserve said nothing to dispel the likelihood of a rate rise in June, saying that the recent slowdown was temporary and that the fundamentals behind consumption growth remained intact. This appeared to be supported by the subsequent strong jobs data released in the first week of May. In Europe, Draghi conceded that recent data were encouraging but still felt that there were risks to the downside and was in no hurry to tighten monetary policy.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Record low fear, record high debt
Potential banana-skins came and went with little effect on valuations. This month saw the passing of French elections, aggressive posturing by nuclear states and a loose agreement to kick the US government's debt-ceiling down the road to September. The VIX index, commonly known as the fear index, was at its lowest level since February 2007, prior to the Great Crash. This suggested that investors had little fear of an impending upset, despite record levels of debt and growing political concerns. It more likely reflected the complacent view that central banks would not allow a serious crash.
There was little to be gained by disputing claims of stronger growth ahead, although we noted that this was currently more prevalent in the soft (survey) data than the actual data. If those with the most money believed it, they would continue to push markets higher. However, points to ponder included whether President Trump would deliver on his US growth promise (and whether that helped or hindered other nations), when central banks would feel obliged to withdraw their monetary support and how valuations would react, and how Brexit negotiations would affect growth in the UK and wider Europe.
What was less debatable was the record, and growing, level of global debt. Stories of consumers being squeezed by falling real incomes were increasing, ranging from default rates on car loans to a Canadian mortgage lender taking out a $2bn lifeline at punitive rates. This month saw set-backs in consumer spending in both the US and UK. The question was whether these were blips or the start of something more significant. On the flip-side there remained a need for income: whilst cash offered no return, a bid would remain for assets with a regular income.
The VIX fear index is at its lowest level since February 2007, prior to the Great Crash, suggesting investors have little fear of an impending upset despite record levels of debt and growing political concerns.
The strength in sterling reduced the value of our overseas funds, but domestically focussed smaller companies showed solid gains, well represented in our income holdings.
Sterling strength weighed on overseas funds
The strength in sterling reduced the value of our overseas funds. The exception was our European fund on the higher-risk accounts, which benefited from a stronger Euro.
Smaller UK companies outperformed
Although larger UK companies with overseas exposure fell over the month, smaller domestically focussed companies showed gains of 2-4%. These are well represented in our income funds, in particular the Unicorn Income fund which gained over 7%.
Diversified and ready for opportunity
Greater uncertainty over wider geopolitical issues and a global mountain of debt meant that we anticipated an interesting and possibly volatile period ahead. Previous events had highlighted the benefits of holding a robust, diversified portfolio over the costs of taking bets on major outcomes. We maintained diversified portfolios with the capacity to take advantage of opportunities when they became available.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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