Whitechurch Asset Views - March 2017
February was a month of universal price rises across Developed Market equities, higher risk Emerging Market benchmarks as well as safe havens such as lower risk bond markets and gold – making it difficult to see what was the key themes motivating investors. Surely something has to give?
On one hand for equity markets it appeared to be a case that “a rising tide lifts all boats” whereby positive news-flow across the global economy was driving stockmarkets higher. Global manufacturing Purchasing Managers Indices (PMIs), which provide an indicator of business confidence, continue to improve and global economic growth is now widely predicted to exceed 3% this year.
However, the spectre of political uncertainty has remained prominent enough to tone down the sentiment to “cautiously optimistic” and this saw more defensive equity sectors favoured whilst bond markets saw surprisingly strong demand (despite increasing inflation and likelihood of rising interest rates).
The change in leadership to more defensive sectors was particularly pronounced in the UK stockmarket and this was exploited by defensive stalwarts such as Woodford, Evenlode, Trojan and Rathbones. Overseas equity markets enjoyed a strong rally over February, but it was also quality and defensive sectors leading the way as bond yields across the world fell substantially. The best performing sectors were the defensive areas of Healthcare, Staples, Utilities, IT, which suggests that markets continue to climb a wall of worry rather than being driven by bullish euphoria!
The US stockmarket forged further ahead and was the best performing of the Developed Markets. During the month the Dow Jones index posted twelve consecutive daily gains for the first time in thirty years as Trump’s pro-growth policies continue to create a wave of optimism. But with the volatility index at very low levels, we wonder if investors are becoming complacent as to whether the promises can be translated into economic growth. Whilst burgeoning optimism and high valuations does make us cautious on US equities overall, we do believe that smaller companies can be beneficiaries of the focus on domestic growth. But our favour for Developed Market equities is focused towards Japan and Europe.
Following the sell-off that followed Trump’s election, Asian and Emerging Markets have returned to favour so far this year and in February, these markets continued to produce positive returns based on expectations of stronger global growth.
Despite economic figures continuing to suggest that we are seeing a reflationary outlook, the surprise in February was that bond markets signalled the opposite. After nearly six months of coming under pressure, government bond markets enjoyed a revival and, in particular, UK gilts saw a strong rally. A cooling off in commodity prices leading to reduced inflationary pressures and concerns over future political uncertainty seemed to be the driving factors. Such moves reinforces our view 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.
This month saw the last UK Spring Budget, which was a bit of a damp squib really. The Budget had little to say of note from an investment perspective, with the only exception being the reduction in the annual dividend allowance from £5,000 to £2,000.
The unpredictable politically driven events will continue to dominate headlines. Our view remains that these continue to be a sideshow and are not influential in our investment strategy or a reason not to invest. We have seen that hiding in cash as protection from last year’s shock events would have seen you 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.