Global Market Overview
After a strong first quarter, global equities, across the board, rose again in April, boosted by more positive economic data, some better than expected corporate results and the ongoing support of central banks which remained in accommodative mode.
The MSCI World index advanced 3.50%. The FTSE World Europe ex UK index rose 4.03%, closely followed by the S&P 500 index which returned 3.97%, hitting another all-time high late in the month. The FTSE All Share index (+2.68%) underperformed global equities over the month but this was largely driven by poor performance in the mining sector which dominates the large cap index. Interestingly the FTSE 250 (excluding Investment Trusts) index which is made up of mid cap companies fared much better by rising 4.40%. The MSCI Emerging Markets index rose 2.06% and the MSCI Asia ex Japan index 1.9% both underperforming the MSCI World index; although most markets recorded gains fears of a reduction in policy support by the authorities led to more muted returns in China. The market was closed in Japan for an extended period during which the emperor abdicated, paving the way for his successor but overall generated a positive return for the TSE TOPIX index of 1.6%.
After reporting on increased fears of a recession in last month’s note, economic data coming out of the US is defying expectations. In the March labour market report a gain in the nonfarm payroll numbers was higher than consensus estimates of 196,000 and unemployment remained steady at 3.8%. Wage growth was a positive 3.3% year on year. This is supportive of consumption but not so high as to raise concerns about inflationary pressures. The first estimate of Q1 GDP growth was much higher than expected at 3.2% annualised. However, the underlying data is mixed with 0.7% coming from rising inventories and 1.0% from improving trade whilst real domestic final demand has decelerated. The purchasing managers’ indices (PMIs) for manufacturing increased to 55.3for March whilst the non-manufacturing index decreased to 56.1%, both levels crucially remaining well above the 50 level which indicates whether or not an economy is expanding or contracting. Meanwhile, inflation as measured by core CPI was lower than expected at 2.0% year on year in March.
In Europe the picture continues to be mixed. The manufacturing PMI remains below 50, nudging higher in April to 47.8. The services PMI also improved to 52.5. Overall the composite PMI declined to 51.3 in April from 51.6 in March. The unemployment rate fell slightly to 7.7%. Overall economic growth remains fairly resilient with Eurozone GDP expanding by 0.4% quarter on quarter, with growth in Italy and Spain surprising on the upside. This compares to a rate of 0.1% growth at the end of 2018. Core CPI slowed to 0.8% year on year, its lowest level for a year. Against this backdrop, the European Central Bank (ECB) unsurprisingly left interest rates unchanged. Ratings agency, Standard & Poor’s maintained an investment grade rating of BBB for Italy but retained a negative outlook. This alleviates some of the risk in the market.
In the UK, Brexit rumbles on with the EU having granted an extension until 31st October, avoiding a no deal Brexit on 12 April. In spite of the political turmoil UK economic data is proving remarkably resilient with the manufacturing PMI rising to 55.1%, its highest reading in a year and retail sales increasing for a third consecutive month in March, boosted by a robust labour market. The unemployment rate remained at 3.9%, the lowest rate since 1975 and wage growth rose 3.4% year on year. Overall, the latest GDP release showed that the economy grew by 0.2% in February. This is slower than the 0.5% rate recorded in January and it is quite possible that the recovery in the manufacturing PMI was driven by stockpiling in the run-up to the original Brexit deadline of 31st March.
Japanese economic data released in March was mixed with industrial production falling more sharply than expected but other news flow was very limited with the extended Golden Week public holidays for the start of the new imperial era leading to subdued market activity. The Bank of Japan maintained its accommodative stance towards interest rates with no change to its policy.
China’s Q1 GDP grew 6.4% year on year which was ahead of expectations. PMI data was mixed with manufacturing falling to 50.2 but still above the multi-year low of 48.3 recorded in January whilst service sector PMI increased. With industrial production growth and retail sales growth both rising in March it appears that fiscal and monetary stimulus are having the desired effect. Manufacturing PMIs in Korea and Taiwan improved again in April but remain below 50. In India the central bank cut its benchmark interest rate to 6% to stimulate growth.
Elsewhere in Emerging Markets fortunes were, as usual, mixed. Oil exporting nations continued to benefit from the rally in crude oil prices whereas ongoing policy concerns continue to weigh on Turkey.
The strength in risk appetite over the month was reflected in the performance of bonds with corporates outperforming governments and government bonds declining. US 1-year Treasury yields rose nine basis points in April on the back of positive economic data. The ICE Bank of American Merrill Lynch US Treasury index fell 0.37%. The FTSE Actuaries UK Conventional Gilt All Stocks index fell 1.52%, paring back last month’s gain of 3.2%.
The oil price rose 6.28%.
Performance of RPW Models over one month to 30th April 2019
All RPW models advanced over the month. The RPW Adventurous Model returned 4.16%, the RPW Moderately Adventurous 2.98%, The RPW Balanced Model 2.21%, RPW Moderately Cautious 1.15% and the Cautious Model rose 0.65%.
Performance of RPW Models over three months to 30th April 2019
Over the past three months, the RPW Adventurous Model has advanced 8.99%, the RPW Moderately Adventurous Model by 6.61% and the RPW Balanced Model by 5.32%. Meanwhile the RPW Moderately Cautious Model returned 3.45% and the RPW Cautious Model 2.24%.
Performance of RPW Models over one year to 30th April 2019
Over one year, the RPW Adventurous Model has generated a return of 6.28%, the RPW Moderately Adventurous 4.67%, the RPW Balanced Model 3.83%, RPW Moderately Cautious 3.04% and the RPW Cautious Model 2.26%.
In the three years to 30th April 2019, the Cautious model has delivered a return of 12.32% (not including fees). This compares to a return of the ARC Sterling Cautious index of 10.13%. Over the same period the RPW Adventurous Model has returned 48.72% (not including fees). This compares to the ARC Sterling Equity Risk index return of 31.08%.
(Source: Financial Express Analytics, Total return, gross of fees, as at 30th April 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.
Overall it was a good month for actively managed funds. Legg Mason Japan Equity which is only held in the Adventurous Model owing to its very high level of volatility, was the top performer rising 6.11% over the month. Jupiter North American Income rose a pleasing 5.49% outperforming the sector average (+4.55%) and the S&P 500 index (+3.97%). Blackrock European Dynamic, held across all models, rose 5.17% versus its benchmark the FTSE World Europe ex UK index return of 4.03%. Its mid and small cap exposure also boosted Invesco UK Strategic Income which rose 4.26% beating the FTSE All-Share return of 2.68% but underperforming the FTSE 250 index return of 4.40%.
The only negative return was posted by Allianz Gilt Yield fund which declined by 1.48% but remained ahead of the FTSE Actuaries UK Conventional Gilt All Stocks index (-1.52%) and the sector (-1.68%).
Global economic data was better than expected in April and fears of a recession appear to have eased. Markets have risen accordingly but it is notable that much of these gains have been driven by an expansion in the Price/Earnings ratio rather than a rise in the underlying earnings. The threat of a US/China trade war still lurks and whilst central banks have continued with their loose monetary stance the oil price has risen quite dramatically and labour costs are rising. In other words, this is not a time to be complacent. However, the fact that this economic recovery is so long in the tooth shouldn’t be a cause for concern per se. The pace of the recovery has been much more muted than in other cycles so the fact that this is one of the longest periods of post war expansion could just mean lower growth for much longer. Under this scenario investing in actively managed funds which have the potential and have demonstrated the ability to outperform their benchmarks at the same time as keeping costs down where possible is a sensible approach. So too is ensuring that there is some ballast to help portfolios weather the inevitable downturns.
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.
21st May 2019