Europe takes the lead as sentiment soars
Apart from a mid-month hiccup when President Trump sacked the Director of the FBI for being too inquisitive, stock markets performed strongly, with record closing highs in the US, UK and Germany. Europe was flavour of the month, gaining over 5% in sterling terms. Company earnings beat expectations across a broad spectrum, with the Eurozone seeing the highest number of corporate earnings upgrades since 2010. Despite the strength, we remained concerned at how complacently investors were viewing the relationship between bonds and equities.
Record highs and a weaker pound boost returns
Apart from a mid-month hiccup, when President Trump sacked the Director of the FBI for being too inquisitive, stock markets performed strongly with record closing highs in the US, UK and Germany. In sterling terms, Europe was flavour of the month, gaining over 5%, with the UK and Japan not far behind. Shares in the US and emerging markets took a breather, rising around 1.5%, and UK fixed interest bonds rallied around 1% over the month.
Sterling weakened as a shockingly inept election campaign by the Conservatives brought fears of a hung parliament in which a "coalition of chaos" could potentially rule. Approaching election day, markets appeared sanguine over the eventual outcome, with equities close to record highs and 10-year bond yields back at 1%.
Macron lifts Europe while OPEC disappoints
Europe was the new "go-to" area, and not just for half-term holidays. With the threat of Euro-scepticism subsiding after an emphatic Macron victory, investor sentiment hit a decade high, encouraged by improving growth data and subdued inflation.
Minutes from the recent meeting of the US Federal Reserve concluded that it would be prudent to wait for further confirmation that the recent slowdown was temporary before removing their accommodative policies. However, they did also discuss planning to gradually reduce their bond holdings acquired via their quantitative easing programme. After a month of mixed economic data but improving corporate earnings, bond markets priced in a 90% likelihood of a June interest rate rise.
OPEC reached a deal to extend production cuts into 2018, but fickle traders had expected more and knocked $3 off the price of a barrel of oil.
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
Markets appear unshakable, but complacency gives us pause
Economic data from the US and UK were still mixed. The underlying trends remained positive, but question marks persisted over how sustainable they were in the face of rising interest rates in America and prolonged Brexit negotiations in the UK. By contrast, Europe delivered stronger growth, with industry surveys hinting at more to come.
Company earnings in Europe, Japan and the US beat expectations across a broad spectrum. The Eurozone saw the highest number of corporate earnings upgrades since 2010. This was encouraging news, but particularly in the US it should be borne in mind that challenging share prices needed this simply to justify existing levels.
For the time being, stock markets appeared unshakable, which was partly down to the collective global analysis of all potential events. Simply put, investors felt that once a concern had been widely discussed, the possibility of it happening was reflected in current asset prices, leaving little reaction if the event took place.
Due to the ongoing central bank asset-purchase programmes, fixed interest bonds were expensive. Whilst this remained the case, equities by comparison offered better value, leading to a "buy the dips" mentality on any set-back. We were concerned at how complacently investors were viewing this relationship, given that we were no longer in a deflationary environment and the balance of monetary policy was shifting from adding stimulus to gently removing it.
For the time being, the need for income would probably continue to support asset prices, but we felt that markets were overdue a correction and retained our cautious positioning.
For now, stock markets appear unshakable, which is partly down to the collective global analysis of all potential events: once a concern has been widely discussed, investors feel the possibility is already reflected in prices.
We continued to favour equities and absolute return funds over fixed interest. A weaker currency helped our UK companies with overseas exposure to outperform those more reliant on the domestic economy, though all showed gains over the month.
Equities and absolute return over fixed interest
We continued to favour equities and absolute return funds over fixed interest. We were still holding the additional bond fund bought in January, but with 10-year yields dipping below 1% we were looking to reduce our exposure.
Weaker sterling benefited overseas earners
The weaker currency helped our UK companies that have overseas exposure to outperform those more reliant on the domestic economy, though all showed gains over the month.
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.
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