What happened in the markets over the quarter?
The UK stock market maintained its upwards trajectory with the FTSE All Share making gains of 4% over the quarter. Large caps continue to drive the rally with a weak pound enhancing overseas earnings. The FTSE 100 hit record highs in March, breaking the 7,400 barrier.
The US market’s bull run continued unabated. US equities gained 4.8% as the ‘Trump trade’ (greater economic stimulus, tax cuts and deregulation) provided ongoing momentum.
Asian equities and emerging markets were two of the biggest winners over the quarter, with the former making gains of 11.5%. A greater demand for riskier assets after the US election (the reflation trade) and positive global growth projections contributed to this outperformance.
The IT sector delivered returns of 11% with technology leaders Apple and Facebook contributing $227 billion in market value over the period. Potential US tax cuts and repatriation of foreign cash adds to the bullish outlook.
With improving economic fundamentals and cheap valuations taking precedence over political risk, inflows into European equities drove the sector 7.4% higher.
Gold strengthened by 5.9% as higher expectations of stock market volatility in a reflationary environment increased its safe haven appeal.
Oil was the biggest faller, with increasing US inventories and drilling activity negating the impact of OPEC production cuts. The energy sector as a whole delivered losses of almost 6%.
As can be expected in an environment where inflation and interest rates are rising, fixed income sectors provided minimal or negative returns
The pound made gains of only 0.4% against the euro despite rallying by over 3 cents from mid-March. Some lost ground was recovered against the dollar as the pound strengthened by 1.7%.
Gold and infrastructure funds outperformed over the quarter with the latter benefiting from Trump’s economic stimulus pledge.
Only three of the 65 funds on the Recommended List failed to generate a positive return over the quarter. Just under half of the funds outperformed the FTSE All Share’s return of 4%. As reflected by inflows into riskier assets, funds offering exposure to Asian and emerging markets were some of the biggest winners.
Funds exhibiting a growth bias were notable performers and US and UK equity funds beneficiaries of ongoing bull markets. Specialist funds focusing on sustainability and luxury brands also offered the investor healthy quarterly returns.
Absolute return funds failed to rebound from last quarter’s poor performance as equity markets continued to soar.
Funds on our Recommended List reflected the negative returns of the energy sector and fixed income funds continued to underperform.
Past performance is not a reliable indicator of future results
Source: Morningstar Direct as at 31 March 2017.
Indices used: FTSE All World Ex UK TR GBP, FTSE AllSh TR GBP, S&P 500 TR USD, FTSE Europe All Cap Ex UK TR USD, MSCI EM IMI GR USD, Topix TR JPY, MSCI AC Asia Pac Ex JPN GR USD, MSCI Sector indices, Barclays Global Agg Float Adj TR Hdg GBP, FTSE Gilts All Stocks TR GBP, Barclays Gbl Infl Linked UK TR GBP, JBM GBI US Traded TR USD, JPM GBI Global European TR EUR, BofAML Global HY Hdg GBP, FTSE EPRA/NAREIT Developed TR GBP, Oil Price Brent Crude PR, Gold London AM Fixing PR USD.
Market & economic outlook for 2017
The global economy is currently full of confidence as the economic outlook has been improving broadly across the world. The outlook has shifted away from an expectation of lower interest rates for longer, towards reflation; where growth and inflation are positive forces in the economy. The downward trend of interest rates has been broken and has swung the other way, with the US raising rates already this year and the expectation of another couple of rises before the year end.
Business confidence is positive in Japan, Asia and Europe. In the US, investors are now waiting for the promised stimulus measures from President Trump. Despite the US market looking expensive many expect it to go higher with the promised stimulus, and with this we may experience a period of exuberance with company valuations moving higher. However, if President Trump disappoints then the markets could be vulnerable and could react badly to negative news.
UK companies are also experiencing positive momentum. Exporters are being helped by the weak pound and the current global rebound. Domestic companies are finding it a bit more difficult and are under pricing pressure. However, with rock-bottom interest rates, solid consumer confidence and record rates of employment growth helping to support consumer spending, we doubt that growth in spending, or overall GDP, is about to suddenly grind to a halt in the quarters ahead.
Its likely markets will tread water in the summer months as investors wait for the the stimulus measures from President Trump, more certainty surrounding the Brexit negotiations, and the results of the various European elections; starting with the first stage of the French elections in late April.
During this time we continue with the themes we talked about earlier in the year, principally Equities over Bonds. Within equities there is a case for:
• Growth and value themes equally. Recently we have seen a sector rotation from growth companies to value (cheap) companies and now both types look attractive.
• Emerging markets and Asia appear strong due to growth prospects.
• Disruption and sustainability remain core long-term themes. Technology is driving innovation and change and ultimately spurring global growth. Despite President Trump’s rhetoric on global warming, the rest of the world, notably China, is focusing on making the world a better place. Spending on sustainable energy and living projects is expanding rapidly.
• Banks and Oil shares. Both of these are recovery plays. They will benefit from higher interest rates and oil companies will benefit from higher oil prices. The oil price has been languishing due to a glut of US shale supplies, however it could rise from here. Both sectors should provide solid dividends and dividend growth over the long term.
UK based investors now need to think about currency when investing abroad. Sterling has depreciated about 16% versus the US dollar since Brexit, although year-to-date it has appreciated 2%. It is very difficult to predict currency moves but after such a depreciation it wouldn’t be surprising if sterling swung the other way. Therefore, in the short term UK equities might trump global equities. UK smaller companies have been left behind post-Brexit and most are now looking cheap with Brexit concerns having been priced in.
The information we provide in this Investment Outlook are opinions provided by TD Direct Investing or one of its partners on whether to buy a specific investment. None of the opinions we provide are a personal recommendation.
Investors should be aware that the value of investments can fall as well as rise, you may get back less than you invested. Past performance is not a reliable indicator of future returns.If you are unsure about the suitability of a particular investment you should speak to a suitably qualified financial adviser.