UK equities performed favourably, with the FSTE100 gaining 3%, however the US and emerging markets finished the month close to where they started.
In the UK, figures for first-quarter GDP were slightly behind expectations, at 0.8%. As in the US, poor weather conditions at the start of the year were partially to blame, as industries such as agriculture witnessed a sharp contraction in comparison with the last quarter. Despite this, markets showed a welcome gain with the FTSE100 pushing beyond the 6700 mark, aided by an increase in M&A speculation, led of course by Pfizer’s continuing bid to buy AstraZeneca.
In Europe, the slow rate of economic recovery continued on the back of positive business and consumer confidence indicators, despite the ongoing troubles in Ukraine. Improving confidence comes at a time when the region’s inflation outlook continues to weaken. Furthermore, bank lending is still falling with loans to the private sector and to non-financial companies contracting slightly. There is growing pressure on the ECB to utilise monetary policy to help support the still-fragile recovery. Mario Draghi continues to offer hints that monetary stimulus could be on the way however may need to deliver should inflation deteriorate much further.
The US also released figures for a weather-affected first quarter with GDP showing the economy had grown by just 0.1%. This was well below forecasts of 1.1%, however the markets were not too badly affected by the news.
In China, there was some welcome news with first quarter GDP figures showing that the economy had advanced by 7.4% year on year which was marginally higher than expected. This positive news comes at a time when fears of a slow-down in China and worries over credit. However, we still expect Chinese growth to continue to slow over the coming months as the economy attempts to rebalance towards a more consumption led model rather than an investment led one.
Sentiment for Japanese markets continues to decline, with the TOPIX falling by 3.4% in April. The question for many investors is whether the Bank of Japan will unleash another round of quantitative easing. Currently, the Bank of Japan remains tight lipped on further monetary stimulus as it waits to see the economic impact of the controversial sales tax increase that came into force at the beginning of April.
Elsewhere in emerging markets, there was continued unrest in Ukraine throughout April, which has prompted the west to place further sanctions on Russia for its part in the conflict.
Bond yields declined further over the last month and have reached multi-year lows in many European countries. A year ago, Spain’s 10-year bonds yielded 4.7% and now the yield stands at just over 3%. Such sharp contractions have been blamed on the deflationary environment that has weighed heavily on bond yields.
Outlook
Now that the bad weather experienced in Q1 has passed, we expect markets to brighten up in a similar fashion and expect positive equity performance over the coming months. Despite weaker than expected GDP figures in Western economies for the first quarter, other economic indicators seem to be pointing in the right direction.
A close eye will be kept on the Indian elections, the world’s biggest democratic exercise, where polls suggest a lead for Narendra Modi, who is seen as investor-friendly and his election would no doubt prove positive for markets. Modi’s track record for economic and business reform could be key in helping the country revitalise its slowing economy.
The US continues with its tapering of quantitative easing which markets seem to be reacting positively to. The next obstacle is likely to be a rise in interest rates which we expect to happen next year, with the UK set to follow suit after the 2015 general election.
Please note, our Investment Commentary is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.