Counter-intuitive price action as weak data lifts UK shares
To the casual observer, last month's price action would have appeared counter-intuitive. The UK stock market's response to consistently weaker economic data was to rally share prices by up to 7%, with the biggest moves generally coming from the larger, more overseas-orientated companies. By contrast, US indices were broadly flat in dollar terms despite a better-than-expected earnings season and ongoing evidence of growth.
Weak UK growth raises questions while global markets advance
In the UK, economic growth for the first quarter barely registered, showing a rise of just 0.1%. This followed weaker than expected inflation, retail sales and consumer credit data. Whilst some of the numbers reflected the impact of March's unseasonal weather, the near stagnation raised questions about the underlying strength of the economy. That left an interest rate rise in May no more than a remote possibility.
European shares also benefited from a falling currency and rose by over 4%. Japanese and Asian shares rose by around 3%. Growth in the eurozone hit its slowest pace for a year and a half in the first quarter of 2018, confirming fears of a slowdown in the single currency area after a stronger-than-expected 2017. The economy of the single currency area grew by 0.4% between the end of last year and the opening three months of 2018, compared to 0.7% for the final quarter of 2017.
Governor of the Bank of England, Mark Carney, said there "will be some differences of view" at May's Monetary Policy Committee meeting and that he was "conscious that there are other meetings over the course of this year". Together with the weaker economic data, this was taken as guidance that the Bank could afford to leave rates unchanged for now and assess the situation over the coming months.
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
Strong US earnings meet a flat market, and the 3% yield level looms
The UK's Monetary Policy Committee face an interesting dilemma. Recent economic data, including inflation, have weakened, notwithstanding the rise in employment to a record high. By historic standards, the economy is not showing the strength that would normally provoke a rate rise. But, taking a step back, we need to consider whether the situation is dire enough to warrant the continuation of the historically low "emergency rate of 0.5%" set after the Great Financial Crash. Levels of debt are too high and would be vulnerable to higher interest rates, but it seems unlikely that these debt levels will fall whilst the cost of borrowing is so cheap.
Price action in the US stock markets has been noteworthy. With over half of the S&P 500 companies having released their first-quarter results, almost 80% of them topped analysts' expectations. According to Thomson Reuters, earnings were on course for a rise of nearly 20% compared with the first quarter of the previous year. And yet the stock market was barely positive over the month and technically looks set for further falls. We should not be surprised by this, having long argued that share prices were allowing for a lot of good news, but it is an interesting turn around.
During the month the yield on the US 10-year government bond pushed above the 3% level. Although it is fair to question the significance of 3% as opposed to 2.95%, it was the highest level for four years and is a big deal to bond traders. It also seemed to be a big deal to equity investors in the US, who felt that if 3% were broken in a meaningful way, and so early into the quantitative tightening process, then there would be a greater chance of higher long-term rates, and that would not be good news for companies.
Emerging markets may be a developing concern. By their nature there are always idiosyncratic problems (Argentina, Venezuela, Turkey) but the numbers look to be increasing at a time when the US dollar is back in favour. In the past, there has been a strong link between a rising dollar and falling emerging markets.
Almost 80% of S&P 500 companies topped expectations, and yet the stock market was barely positive over the month.
Our portfolios have been constructed to withstand periods of higher volatility. We spend a lot of time selecting funds that, when combined, produce robust portfolios that track a steadier path than the underlying markets.
Target levels triggered, risk reduced
In early May one of our target levels was met, triggering the sale of a UK equity tracker fund and, for the higher-risk portfolios, the disposal of the Jupiter European fund, which has performed extremely well.
Further targets in place
We still have targets to further reduce risk, and to buy assets that we feel offer better value over the longer term.
Underweight fixed interest
We remain underweight fixed interest bond funds, preferring a combination of equities, property and absolute return funds.
Built for higher volatility
Our portfolios have been constructed to withstand periods of higher volatility. We spend a lot of time selecting funds that, when combined, produce robust portfolios that track a steadier path than the underlying markets.
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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.
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