Whitechurch Asset Views - April 2017
It was a strange month for global stockmarkets, as March proved not too dissimilar to February in its outcome. With the exception of the US and Japan, which generally moved sideways, most equity markets moved higher. However, this was also echoed by government bond markets, with yields narrowing as investor ebullience over the Trump-driven reflation trade began to waver.
There were several notable events in March, not least the historic moment of the UK triggering Article 50 and embarking on a lengthy divorce from the European Union (EU). As Brexit has been dominating headlines since the momentous vote last June, it felt like blessed relief now it has been formally started. With sterling already weakened considerably and with the outlook for the UK economy looking relatively robust, UK smaller companies enjoyed a strong month relatively, although all areas of the UK stockmarket moved higher.
Article 50 did little to dampen the enthusiasm for European equities over the month; and these were the pick of regional stockmarkets. The Dutch elections threw up no unwelcome surprises and the impetus of a Le Pen victory started to diminish in the eyes of investors. With corporate profits also looking healthier, a supportive Central Bank and signs of economic growth, the prospects for Europe appear on the up.
It is the US that is generally dictating the fortunes of global stockmarkets and the global economy. The US Federal Reserve (the Fed) announced that it would be raising rates by 0.25% in mid-March and that there were likely to be two further rate hikes this year, depending on the data. The Fed has been telegraphing its intentions to the markets for some time and so there was little impact. However, US equities did struggle over the month. Much of this was due to concerns that Trump may struggle to get his pro-growth policies through after being defeated by Congress on his proposed healthcare reform.
With the exception of Japan, whose equity markets have gone no where this year (in local currency terms), Asian and Emerging Market stockmarkets had a good month (and quarter) even though the Trump reflation trade showed signs of faltering. We still favour Japan over the US in terms of fundamentals and we retain an overweight to Asian and Emerging Markets for higher risk portfolios, given that the long-term dynamics for these markets remain favourable.
March was pretty much an extension of February for bond markets. Government bond yields narrowed by the end of the month despite a rise in US interest rates and higher headline inflation numbers. However, a stalling in oil and commodity prices combined with doubts over the reflationary trade saw investors move back to lower risk assets. The recent move does reinforce our belief that although we see little value in the asset class it is too early to have a high conviction that the inflationary environment is here to stay just yet or that this is the end of the 30 year bull market in bonds.
Looking ahead, unpredictable politically driven events will continue to dominate headlines, not least the latest geo-political tensions over Syria, the French elections and incessant rumblings over Brexit. However, our view remains that such events cannot be accounted for and are not influential in our investment strategy, or a reason to not invest. We have seen that hiding in cash in 2016 as protection from last year’s shock events would have seen investors miss out on double digit returns across most global equity and bond markets. Indeed, even with some equity indices reaching all-time highs, we believe that the year ahead can provide many opportunities for those prepared to ignore short-term noise, focus on valuations and take a longer-term perspective.