Global Market Overview
Global equities advanced for a third consecutive month, rounding off a quarter which saw portfolio valuations rebound after a torrid end to 2018. Tensions between the US and China continued to ease and central banks retained an accommodative stance with regard to interest rates, setting the stage for a continuation of the benign environment beloved by market participants.
The MSCI World index rose 3.42%, bringing its return for the first quarter to an impressive 9.94%. The US led markets higher with the S&P 500 index returning 4.01%, closely followed by Asia Pacific ex Japan which, boosted by gains in China, rose 3.83%. Japan (+2.75%) and Europe (+2.57%) were the main laggards. The MSCI Emerging Markets index rose 2.93% with strength in Asia offset by weakness in Latin America. Real estate, consumer staples and technology delivered the strongest returns whilst financials (once again) failed to keep up with a rising market.
Over the first quarter 37 out of 38 assets, monitored by fund management group M&G, recorded a positive return in local currency terms (the exception being silver) with 11 producing double digit returns.
Economic growth in the US is not as strong as it has been with the Fed lowering its projections for US growth and inflation. Q4 GDP (quarter-on-quarter, annualised) was adjusted downwards to 2.2% from the initial 2.6% reading. As a result, it reduced its expectations for interest rate rises causing the Treasury yield curve to invert, a signal which some interpret as presaging a recession. The recent results of the Duke CFO survey suggested that business investment’s contribution to growth could be negative from here but despite this weaker growth outlook, labour markets have held up well with unemployment declining to 3.8% in the US in February and wage growth picking up.
The Eurozone continues to be plagued by growth fears. The Eurozone economy grew by just 0.2% in the final three months of 2018. Germany saw zero growth whilst Italy slipped into recession. The flash Purchasing Managers’ Index (PMI) for manufacturing dipped to 47.6 in March from February’s reading of 49.3, indicating further contraction. Unsurprisingly against this backdrop the European Central Bank (ECB) kept the deposit rate steady at -0.4% and extended the period during which it would not raise rates from this summer until next year, at the earliest.
There is still no clear path forward in the UK with the original date for departure from the EU having now passed as Theresa May failed to get her Withdrawal Bill through Parliament at the third attempt. A further extension, to October 31st, has now been granted by the EU member states to give her more time to try to cobble together a parliamentary consensus. Interestingly despite all the twists and turns dominating the headlines, the sterling/euro exchange rate remained broadly unchanged over the course of the month. This followed a rally in the pound versus the major currencies in January and February as it became clearer that there is no parliamentary majority for a “no deal” Brexit. The resilience of sterling may also be attributable to the fact that the UK economy has weakened but not collapsed. It is being supported by a strong labour market, with unemployment at 3.9% and positive wage growth of 3.4% year on year in January (according to ONS figures released on March 19th). Consumer confidence and business investment have been impacted by Brexit-related uncertainty but as a result the Bank of England’s Monetary Policy Committee voted unanimously at its meeting on 20th March to keep interest rates on hold at 0.75%.
Japanese economic data released in March was in line with expectations. Headline inflation was slightly ahead of forecasts with a wider range of goods seeing some increase in prices. The Bank of Japan’s quarterly Tankan survey was also released just after the end of the month and demonstrated that conditions for large manufacturers have deteriorated. This was not unexpected given the global backdrop of slower economic activity.
China’s economy grew at its weakest pace since 1990 with the Chinese government lowering its full-year growth target to 6-6.5%. The non-manufacturing PMI increased to 54.8 in March, while the manufacturing PMI recovered to slightly over 50, both numbers indicating expansion. In a bid to boost activity further the authorities have set out plans for higher public spending and tax cuts, while the central bank cut the reserve requirement ratios for banks. Korea and Taiwan’s PMIs did improve in March but remain just below 50.
Elsewhere in Emerging Markets fortunes were mixed. Russia and Colombia benefited from the rally in the price of crude oil whereas in Turkey the lira lost value in response to the governments ongoing attempts to respond to the country’s economic problems.
Bond yields have fallen to very low levels as a result of the more dovish tone adopted by central banks. US 10-year Treasury yields fell 30 basis points over the first quarter reaching their lowest level since late -2017. This equated to a rise of 4.1% in the ICE Bank of American Merrill Lynch US Treasury index. The FTSE Actuaries UK Conventional Gilt All Stocks index rose 3.2%. Corporate bonds were also positive.
The oil price rose 5.99%.
Performance of RPW Models over one month to 31st March 2019
All RPW models advanced over the month. The RPW Adventurous Model returned 2.4%, the RPW Moderately Adventurous 1.94%, The RPW Balanced Model 1.75%, RPW Moderately Cautious 1.67% and the Cautious Model rose 1.28%.
Performance of RPW Models over three months to 31st March 2019
The three-month figures demonstrate just how powerful a start to 2019 we have experienced. The RPW Adventurous Model has advanced 9.51%, reversing much of the losses experienced in the final quarter of 2018. This was closely followed by RPW Moderately Adventurous (+7.4%) and RPW Balanced (+6.32%). Meanwhile the RPW Moderately Cautious Model returned 4.43% and the RPW Cautious Model 2.92%.
Performance of RPW Models over one year to 31st March 2019
Over one year, all RPW models are back in positive territory with the RPW Adventurous Model generating a return of 6.09%, the RPW Moderately Adventurous 5.20%, the RPW Balanced Model 4.34%, RPW Moderately Cautious 3.49% and the RPW Cautious Model 2.61%. These numbers are consistent with expectations but mask a great deal of volatility in the intervening period.
In the three years to 31st March 2019, the Cautious model has delivered a return of 11.93% (not including fees). This compares to a return of the ARC Sterling Cautious index of 8.82%. Over the same period the RPW Adventurous Model has returned 42.08% (not including fees). This compares to the ARC Sterling Equity Risk index return of 28.34%.
(Source: Financial Express Analytics, Total return, gross of fees, as at 31st March 2019).
Please note that these figures are unaudited and indicative. The performance of actual client portfolios may be different. The effect of fees will reduce the returns achieved.
Baillie Gifford Pacific (+4.84%) was the top performing fund, comfortably outpacing the MSCI AC Asia ex Japan index (+3.83%) and the IA Asia Pacific ex Japan sector return (+3.54%).
After a strong February, Merian North American Equity was one of the worst performing funds, returning just 0.64% and lagging the MSCI North America index return of 3.78%. Schroder Tokyo also had another tough month, having been negative in February, but managed to generate a positive return of 0.68%.
Invesco Perpetual UK Strategic Income rose 1.14% which was better than February’s decline of 1.47% but it continues to struggle to make much headway versus the FTSE All Share index which advanced 2.67%. The largest UK companies by market capitalisation fared better with the iShares 100 UK Equity Index tracker posting a 3.08% return. This is perhaps not surprising in a month where Brexit failed to happen despite years of protestations by Prime Minister, Theresa May, to the contrary.
Notwithstanding the ongoing Brexit drama, there have been no significant changes to global trade, monetary policy and inflation expectations to undermine a fairly sanguine view of the global economy and investment markets, at least in the short term. The global economy is clearly slowing but the major concerns that caused the Q4 2018 sell off, namely tighter monetary policy and US-China trade relations, have been addressed with the US administration desisting from further increasing tariffs with China and a change in approach on monetary policy. Recent commentary from some of the key US Federal Reserve officials suggests that the US central bank will allow inflation to run above the target level of 2% for a while so that inflation averages 2% over an as-yet unspecified period of time, rather than moving to increase rates as soon as inflation picks up above target. The Fed could also cut rates to stimulate the economy.
A key question is whether or not the current weakness in global growth is a soft patch or the start of something more sinister. The global consumer is still relatively healthy and this could breathe life back into the manufacturing sectors and encourage business investment intentions. On the other hand, the weakness in manufacturing and business confidence could infect consumer confidence and labour markets.
The current market rally has yet to reach the previous highs but if it does so it will be interesting to see how things progress. In their monthly portfolio review, the managers of JOHCM Global Select fund have identified three scenarios:
Scenario 1: Markets go up with the SAME leadership (e.g. technology, USA, growth) – now more likely given that US interest rates are no longer rising and global growth remains challenged.
Scenario 2: Markets go up with NEW leadership – if so, it will more likely be interest rate sensitive cyclicals than defensive sectors.
Scenario 3: Markets STOP going up – (e.g. sideways volatility or bull market correction or bear market) – now the least likely with the Fed on hold and credit markets stable.
They also take the view that the decade-long outperformance of US versus non-US equity markets has been given a new lease of life by the recent change in US interest rate policy although point out that the trend is statistically stretched and due a reversal at some point. We have noted this in a previous commentary but for now are maintaining our geographical weightings.
Our next quarterly investment strategy meeting is due to take place next week.
Investors should continue to maintain diversified portfolios with a blend of defensive and more risky investments. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
15th April 2019