Our Investment Commentary for Q1 2017 (1 January – 31 March 2017)

Global equity markets have continued to perform strongly this quarter with the MSCI All-Country World Index up 6.7%.This represents the single best quarter for global equity markets since 2013. Global stocks have also managed a fifth straight monthly gain with signs of a further strengthening of global growth helping to maintain momentum.

The gains in developed countries’ equity markets have been led, not surprisingly, by the performance of US equities. Since the start of the year the S&P 500 index is up 5.7% (its best quarterly performance since 2015) with the Dow Jones Industrial Average also gaining 4.9%. Aside from the market’s anticipation of President Trump’s promises of fiscal expansion, regulatory reform and infrastructure spending, US equity gains have also been well supported by a raft of positive economic data. Readings from the New York, Philadelphia and Chicago areas all show a faster pace of business activity. These figures were supported nationally by positive readings on US manufacturing, especially in job growth and new orders. Buoyant consumer confidence readings indicate that American consumers are now more upbeat about the economic outlook than at any time since 2000.

Since January and in the absence of details of President Trump’s reflation ‘trades’, the US Dollar has generally been weaker than its G10 counterparts. It has particularly suffered from speculation that the Federal Reserve’s pace of rate increases in 2017 could be a good deal slower than markets are presently anticipating. Although the Federal Reserve did raise rates at their March meeting, Dollar volatility is likely to continue until US economic growth is perceived to be expanding fast enough to justify further interest rate rises.

In the UK, the FTSE 100 index remains close to its all-time high. It follows the Bank of England’s decision to leave interest rates on hold despite inflation continuing to exceed its 2% target. The Bank’s decision is clearly predicated on the possible effects Brexit may have on the UK economy, which at present continues to expand modestly in areas of manufacturing and construction whilst being underpinned by the UK consumer and the services / financial sectors. Negotiations with the EU, after the invoking of Article 50 of the Lisbon Treaty, will now be carefully scrutinised over the coming months for any signs of UK economic weakness. Sterling may become more volatile as a result.

European equities continue their recovery. The MSCI European index is now trading close to its highest value since December 2015, reflecting better economic data. Amongst the highlights, the Euro area unemployment rate dropped to its lowest level in nearly eight years and Eurozone retail sales also increased at the fastest pace since June of last year reflecting higher Euro area incomes. The defeat of the ‘populist’ Freedom party in the recent Dutch General Election has also added to positive sentiment and has helped to allay fears about a populist ‘surge’ of support in this month’s French presidential election as well as in the forthcoming national elections in Germany in September.

The relative weakness of the US Dollar has generally been positive for the currencies and equity markets of emerging market countries. However, these gains have been tempered by ongoing volatility in the oil price and weakness in certain metals; gold is the one exception and its spot price has risen to over $1,250 an ounce since the beginning of 2017. More mature Asian / Pacific economies, such as Australia and Indonesia, have also been major beneficiaries of the rebound in commodity prices as well as in the recent relative stability of the Chinese economy.

The intermittent strength of the Yen is having a negative effect on Japan’s equity markets. Whilst the Yen’s ‘safe haven’ status might appear to be the market’s perfect ‘antidote’ to US Dollar weakness, the currency’s strength continues to undermine the shares of major exporting companies which feature so prominently in Japan’s equity indices.

Global bonds, led by US Treasuries, have generally seen yields decline over the period; this, in turn, has caused the US Dollar to weaken against other G10 currencies. However, for longer term bond and equity investors, this trend should be welcomed as any disconnect between the relative yields of bonds and equities can often lead to significant corrections in financial markets.

Looking ahead to the second quarter, political developments are likely to affect the global economic outlook with volatility a likely consequence. Key events include the Chinese President’s visit to President Trump with trade and N Korea firmly on the agenda. In addition, markets will be watching closely to see if the Trump administration can deliver on its pre-election promises of tax cuts, de-regulation and infrastructure spending. In Europe, all eyes will be on the French Presidential election and the relative success of the National Front, which could undermine the future of the EU, as well as the start of the Brexit process.

Our approach is to help our clients benefit from attractive equity returns and target sustainable dividends from a diversified portfolio, on the basis of our diligent research and analysis to highlight interesting investment opportunities and mitigate risk as far as possible.

[Matthew Clark, Seabrook Clark Ltd, 5 April 2017]

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. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.

Found this useful?

Please feel free to share it with your contacts and friends through social media.