New highs, then doubt over the reflation trade
An encouraging start to the month saw several stock markets reach new highs before taking a breather as investors began to question the durability of the reflation trade. Asian and European stock markets were the star performers, rising 2-4% in sterling terms. The UK gained around 1% while the US and Japan were mildly negative. Global debt, according to the Institute of International Finance, pushed to a fresh high of £170 trillion, and much of it was not productive.
Asia and Europe lead while the US Healthcare Bill fails
An encouraging start to the month saw several stock markets reach new highs before taking a breather as investors began to question the durability of the reflation trade. The US Federal Reserve's expected 0.25% interest rate hike was well received, but President Trump's failure to steer his Healthcare Bill through Congress led many to doubt whether his infrastructure spending and tax reforms would progress as promised.
Asian and European stock markets were the star performers, rising 2-4%. The UK gained around 1% and the US and Japan were mildly negative, all in sterling terms. Fixed interest bonds took the US rate hike in their stride and rallied further, encouraged by the US Federal Reserve's reluctance to signal a faster pace of rate rises. UK 10-year index-linked bond yields hit a record low of -2.18%. Yes, that is a minus sign.
The Fed eyes balance-sheet reduction while the ECB starts to taper
Central bankers were frequently in the news. The US Federal Reserve spoke of reducing the size of its balance sheet, reversing quantitative easing, before the year-end. This contrasted with the European Central Bank playing down speculation that they would respond to stronger growth by raising interest rates (reducing negative interest rates). The ECB began reducing the amount of monthly asset purchases from Euro 80 to Euro 60 billion, but we were not allowed to call it tapering. The term "Forward Guidance" took on a new meaning when US Fed member Jeffrey Lacker resigned after it emerged that he had divulged information to a journalist ahead of the official release.
The trend towards stronger global economic growth continued, though in many cases the improving "soft data" (surveys) were at odds with the "hard data" (reported activity). For example, the Global Manufacturing Purchasing Managers Index hit a 69-month high, but much of the reported manufacturing showed slower growth during the month. In the United States, employment data and some confidence numbers remained strong but car sales continued to decline and defaults on auto-loans rose.
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
Encouraging growth, but a £170 trillion elephant in the room
Although the growth picture looked encouraging, one fairly large elephant in the room was the level of global debt which, according to the Institute of International Finance, pushed to a fresh high of £170 trillion. And the trouble was that a lot of this debt was not productive: for example, US companies had been leveraging up to buy back their own shares or pay ever larger dividends, rather than investing in the business.
In the UK, the savings ratio fell to 3.3%, the lowest since records began in 1963. This figure reflected not just the level of savings but also the level of borrowings. The concern was that this had been largely responsible for growth in the economy, but would likely decline in the event of rising interest rates or a fall in real disposable income due to wage rises not keeping pace with inflation.
In the US, Congress would have only 5 days when they returned from their Easter break to pass a spending bill allowing an extension of the debt ceiling. Failure to do so could ultimately lead to a shutdown in government spending. The reality was unlikely to be that extreme, but it could have broader implications regarding the Trump administration's ability to implement some of his key policy initiatives like tax reform and healthcare. These policies had helped to stoke the post-election rally, and share prices could be quick to reflect any disappointment.
Two potentially market-moving events were French elections in April and May, where there was currently little expectation of a Le Pen victory, and the US earnings season, where some light would be shed on the health of the economy.
Global debt pushed to a fresh high of £170 trillion, and the trouble is that a lot of this debt is not productive: US companies have been leveraging up to buy back their own shares rather than investing in the business.
We still prefer equities to bonds over the longer term, but feel that in the near term there is a risk that markets have overshot and that a correction in equities could send bond yields lower.
Equities over bonds, but near-term caution
We still prefer equities to bonds over the longer term, but feel that in the near term there is a risk that markets have overshot and that a correction in equities could send bond yields lower.
Diversified with property, absolute return and gold
In addition to bonds and equities, we continued to hold a blend of property, absolute return and gold funds to diversify risk.
Prepared for volatility
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.
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