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Market Review – Q1 2018

By Charlotte Aspinall, Investment Manager.

After 2017’s relative calm for global equity markets, 2018 opened with more of a jolt as investors reacted to the prospect of rising global interest rates, trade wars between China and the US and the ongoing uncertain political environment in Europe.

The start of 2018 saw a sharp reversal of fortunes as higher-than-expected hourly earnings in the US stoked fears of wider inflation throughout the US economy and the prospect of tighter monetary conditions than had previously been anticipated; where low interest rates had previously supported equity markets since 2008’s financial crisis, this was a reminder that they could no longer necessarily be relied upon to prop up markets.

During the quarter, Sterling was pushed higher on expectations that the Bank of England could raise interest rates faster than expected, further derailing equity returns and pushing up bond yields. With 70% of the FTSE 100’s revenue being generated from overseas, a stronger sterling negatively impacts equity returns, whilst higher anticipated interest rates pushes bond prices down and increases yields as investors require more return from being invested in fixed income. Broader concerns surrounding terms of Brexit with only a year to go until the country officially leaves the EU also kept UK markets in negative territory over the quarter.

Europe itself, despite ending -3.4% for the first three months of 2018, confirmed its broader recovery status with Q4 2017 GDP coming in at 0.6% quarter on quarter. With unemployment at 8.1% too, the overall picture for the continent is still positive, although uncertainty remains after an inconclusive national election in Italy.

Looking further afield, the one market to find itself in positive territory by the end of the quarter was Emerging Markets, with the MSCI EM Index +1.4%. Greater political stability in Brazil, where former President Luiz Inácio de Lula da Silva’s criminal conviction was upheld, and Russia where interest rates were cut and its sovereign debt revised upwards, led the leaders in the sector. Questions remain though over the durability of this rally, particularly in light of Russian sanctions after the country’s involvement alongside President Assad in attacks on civilians in Syria.

Japan – a market we recently invested in across our global mandates – had a turbulent start to the year with trade tensions between the US and China weighing on investor sentiment. That and the increasingly hostile dialogue between the US and North Korea contributed to the Yen’s strength over the quarter and – similar to the impact of a strong Pound – contributed to a -4.7% return from the Topix. However, with valuations still attractive, a transforming corporate governance picture and a very low unemployment rate, the outlook for Japanese equities remains favourable.

Overall, the first quarter of 2018 will be remembered for the unexpected volatility that rocked global markets. With strong wage figures coming through from the US triggering broader concerns around global inflation, markets now face the prospect of a changing policy from Central Banks around the globe. However, at the time of writing, markets have since steadied with the IMF maintaining its 3.9% growth forecast for Global GDP in 2018, a sign that the broader global recovery – despite a few wobbles – looks set to continue.