Record highs in the US, but unresolved politics and mixed data persist
In a month where Easter gave a welcome break from the dual politics of Brexit and US-China trade talks, there was a brief pause before equity markets pushed higher, with the main US indices ending April at record levels. Central banks offered forward guidance that interest rates were unlikely to move in the US, UK or Europe for the remainder of the year at least.
Equities advance broadly, with UK domestic shares outperforming
Shares in the US and Europe led the way, rising by around 4%, whilst Japanese, Asian and emerging markets put on a couple of percent. Performance across UK sectors differed markedly as smaller, domestic companies gained 4-5%, boosted by the prospect of a weaker Brexit deal, outperforming larger, global shares by 2-3%. Bonds ended the month fractionally lower.
The US Federal Reserve voted to leave interest rates unchanged, signalling that it did not expect them to move this year. Fed Chair Jerome Powell repeated that policy could still shift in either direction as members "grappled with significant uncertainties," balancing solid economic growth and strong employment data with slowing business investment and consumer spending. This upset both President Trump and investors who had been expecting a more dovish performance; Trump had previously advised that rates should already be 1% lower.
The ECB holds firm while the Bank of England faces a divided outlook
Head of the European Central Bank Mario Draghi expressed confidence that subdued growth in the Eurozone would bounce back, but offered reassurance that interest rates would remain on hold until at least the end of 2019.
In the UK, the Bank of England's Monetary Policy Committee presented its quarterly inflation report. On the optimistic side, future growth had been revised up and the inflation forecast had fallen, conjuring a post-Brexit Goldilocks scenario with no rate rises until 2021. By contrast, the more cautious view pointed to Governor Mark Carney's warning that the Bank of England's current forecast for inflation would require more rate rises than were priced into the bond market.
Corporate earnings and economic data were a mixed bag over the month. Forward-looking surveys suggested some improvement on the previous month's weak showing, but still pointed to subdued activity, with uncertainty over Brexit and global trade talks keeping order books and investment intentions low.
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
A blistering start to the year invites a pause
After a blistering start to the year, with UK and European markets up by over 10% and the main US index 16% higher in sterling terms, we thought it quite reasonable that equity markets would pull back a bit. At the time of writing, markets had fallen by around 2% following Presidential tweets threatening to derail the US-China trade talks.
Twitter apart, the maturity of the business cycle and recent weaker data was a cause for some concern. But we needed to look beyond the headlines and differentiate between fears of an outright recession and a plausible slower-growth scenario. Share prices after the sell-off in the fourth quarter of 2018 reflected a 65% probability of an American recession; at the end of April this had fallen to just 15%. This change of view was no doubt swayed by the Fed's more dovish tone, but it also highlighted the swinging emotions of investors rather than positive economic newsflow.
Activity was probably going to remain subdued until the two issues, Brexit and US-China trade talks, were resolved. Growth had been temporarily boosted by stockpiling of inventories due to uncertainties relating to both, but major orders and investment projects were on hold until businesses knew what they were dealing with.
The downside was that both issues were following political, rather than economic, agendas with timetables for resolution continually being kicked further down the road. On the plus side, central bankers were aware of the fragility of economies and were more prepared than in previous cycles to keep rates close to historic lows and to keep an open mind on the direction of future policy. For now, we needed more evidence before getting too concerned about growth. Brexit negotiations looked to have avoided the no-deal option most likely to hit UK domestic shares, and we knew that President Trump's main objective was to get the US stock market higher as the 2020 election approached. We expected periods of volatility as investors reacted to economic and geopolitical events, but with interest rates so low, investors were likely to look to the markets for a higher level of income.
Share prices after the Q4 2018 sell-off reflected a 65% probability of recession; at the end of April this had fallen to just 15%.
Our positioning remains unchanged, with a continued preference for UK equities and a cautious approach to fixed interest in favour of equities and alternative investments.
Underweight fixed interest
We remain underweight fixed interest, preferring equities and alternative investments. Where we do hold fixed interest, we mostly use funds that have limited exposure to rising interest rates.
UK equities remain our preference
In equities, our preference remains the UK, where we think valuations already reflect concerns over an economic slowdown and yields compare favourably with other asset classes.
Well-diversified portfolios
With so much uncertainty around the world, accompanied by record levels of debt, we believe there is a strong case for running well-diversified portfolios, investing in actively managed funds with sound investment processes.
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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