Equity markets continued to move upwards in the first quarter of 2017 as investors welcomed widespread improvement in global economic data.
The FTSE All-Share generated a total return of 4% over the period as the UK economy continues to outperform post-Brexit expectations. March ended with Theresa May triggering Article 50, starting the formal negotiation process for the UK to leave the EU.
After the outcome of the referendum last year, economists slashed growth forecasts for the UK under the assumptions of reduced investment intentions from businesses alongside weaker consumer spending. While there is evidence of businesses putting investment plans on hold, households have not cut back as expected and this is reflected in strong growth within the services sector. As always, it is difficult to determine the cause for this response by consumers, but it is likely that expenditure has been brought forward ahead of expected price inflation due to the weak pound.
Signs of the pressure on consumers have begun to emerge, but a substantial contribution from trade saw economic growth rise to 0.7% in the final three months of 2016. In the same period, the UK’s current-account deficit made a record improvement, narrowing by £13.6bn and now stands at 2.4% of GDP. While trade is clearly a strong beneficiary of a weaker pound, it is unlikely that this will offset the hit to consumers from rising food and fuel prices.
Global markets have to an extent been driven by the US President’s domestic growth agenda, particularly tax and infrastructure plans. However, Trump’s failure to gain support in Congress for his Healthcare Bill prompted some weakness in US stocks towards the end March, as many will now doubt the extent to which the President can fulfil his highly-ambitious plans. Recent economic data has been more supportive, with US employment and manufacturing statistics both pointing towards solid growth. In response to this improvement, the US central bank raised interest rates by a quarter-point to 1% and one can expect several more rate hikes to come this year.
Eurozone economic growth gathered further momentum over the period, according to survey data that reached a near six-year high in March. Encouragingly, the upturn can be seen within core countries such as France and Germany as well as periphery economies, with both manufacturing and services sectors seeing a large improvement. The pace of recovery in corporate earnings is likely to be the key factor driving European markets this year. We believe that the underlying economic recovery is in the region is now entrenched, and this is evidenced at the corporate level where earnings growth is seeing momentum.
In the UK equities space, we continue to favour companies whose fortunes are not tied to the UK economy. This encapsulates companies that have a big presence overseas, along with smaller-companies that are growing at a faster pace and are less dependent on the UK economy for its growth. The latter would include challenger banks such as Virgin Money, which are very well placed to win market share from traditional lenders. In our global portfolios that we manage for clients, we have a bias towards Europe and the Asia Pacific where the economic cycle is less advanced and share prices are more attractive. This positioning has worked very well in the year to date, as these markets have outperformed the US. We expect this theme to continue in 2017.