Quarter 1 performance
|First quarter 2017
% total return
2017 started on a positive footing. With the exception of Japan, all major stock markets recorded gains in local currency terms for the first quarter. The Nikkei index was held back by the strength of the Yen which weighed on its export led economy but in sterling terms there were advances across the board.
Investors across the globe appear to have embraced the momentous events of last year and are now anticipating policy initiatives and trade deals that will boost corporate profits and stock markets. This confidence in the economic outlook has resulted in the UK and US indices hitting new all time highs.
US markets took an interest rate in their stride as data confirmed a healthy economy and the dollars’ upward trajectory moderated. Emerging Markets in general disregarded possible US protectionist policies with countries in both Asia and Latin America recovering strongly from the previous quarter. China was a notable laggard on internal worries over the high levels of debt and a potential property bubble. It is also one of the most exposed to any change in terms of trade with the US.
Towards the end of the quarter there were signs that the so called ‘Trump Bump’ might be running out of steam as investors questioned whether all of his promised policies will actually be implemented. Europe was the only market to maintain momentum throughout as investors recognised its relatively low valuations together with upgraded corporate earnings and subsiding fears of anti-EU populist parties winning elections.
The upbeat mood on the outlook for growth has produced out-performance for value investors as cyclical sectors such as Banks have led the way across world markets.
Key events of the quarter
President Donald Trump took office on the 20th January and was quick to reiterate his pro growth stance with proposals for fiscal stimulus and tax cuts. World leaders have been keen to secure an audience with Trump to ensure the best trade deal possible for their countries. However, he suffered his first setback with the failure to get his bill to abolish Obamacare passed through Congress.
The first of a number of key Elections in Europe took place with the Dutch populist candidate Geert Wilders losing out to the incumbent Prime Minister Mark Rutte. On the home front, Theresa May finally triggered Article 50 to commence the UK’s 2 year exit process from the European Union.
UK Chancellor Philip Hammond delivered his first Budget. The key announcement was a significant upgrade to the economic growth forecast for this year. Policy measures were broadly fiscal neutral although Hammond had to back down on a proposal to increase NI payments for the self employed. One surprise was the reduction of the recently reduced tax free dividend allowance from £5000 to £2000.
The oil price reached an 18 month high as OPEC production cuts took effect. It subsequently gave up some of the gains as additional US shale output came on stream and Saudi Arabia notified OPEC it had reversed some of January’s cuts.
Economic trends and outlook around the globe
In its latest World Economic Outlook, published on April 18th, the IMF* raised its 2017 global growth forecast from 3.4% to 3.5%, citing a broad global manufacturing recovery and overall better than expected economic data from Europe, China and Japan. However, the organisation flagged persistent headwinds, including protectionist policies and low productivity, and left the 2018 estimate for growth at 3.6%.
Despite initial fears of a sharp Brexit induced slowdown from many bodies, including the Bank of England, the UK held up relatively well in 2016 and growth for the year should come in at around 2%. The Bank also raised its GDP growth forecast for 2017 to 2% while leaving the 2018 estimate at 1.6%. Meanwhile the IMF has also upgraded its estimate to 2.0% this year and 1.5% for 2018.
Inflation jumped to 2.3% in February from 1.8% in January, as the weak pound pushed up the price of imported goods. Unemployment has dipped to its lowest level since 2005 but evidence of slower wage growth could start to put consumer spending under pressure. Indeed, retail sales have dipped as inflation outpaces wage growth. On the other hand, the manufacturing sector remains buoyant as exports flourish. Interest rates were held at 0.25% and the Bank of England is to moderate purchases of government bonds. It flagged that inflation was likely to continue to overshoot its 2% target in coming months and warned that the case for an interest rate rise was strengthening.
The Government appears to be pushing for a hard Brexit which implies Britain will leave the single market, take full control of its borders and control immigration. This standpoint along the possibility of a second Scottish Independence referendum triggered some further weakness in sterling.
The United States
The IMF has maintained US GDP growth forecasts at 2.3% for 2017 and 2.5% for 2018, following 1.6% in 2016. The new US Administration however is more ambitious, targeting economic growth in excess of 3% in each year. The first Budget revealed plans to cut spending on the environment, foreign aid and social services in order to fund increases in military spending.
The US Federal Reserve announced an expected quarter point rise in interest rates in March to a new range of 0.75-1.0% with more expected. This is a response to rising inflation, low unemployment and improving growth prospects. US business confidence indicators are at the highest level for 8 years on optimism over promised tax reform and fewer regulations.
President Trump proceeded with the flagged withdrawal from the Trans Pacific Partnership which pushed the dollar lower. Ford Motor Company cancelled a major investment in Mexico and will invest in Michigan instead suggesting that president Trump’s threatened border taxes are being taken seriously.
The ECB (European Central Bank) upgraded its GDP growth estimates for the Euro area to 1.4 % for 2017, a little below the IMF forecast of 1.7% and 1.6% respectively. The Eurozone has delivered 14 consecutive quarter of growth as Business confidence remained resilient in the face of Brexit.
The ECB left interest rates unchanged in the quarter despite inflation approaching 2%. Its President Mario Draghi said he was more positive about the Eurozone’s prospects and consequently the ECB plans to reduce bond purchases to Euro 60bn pm from the current Euro 80bn.
French voters are next to go the polls and Far Right candidate Marine le Pen has slipped into second place behind Emmanuel Macron in the race for the presidency.
The IMF has upgraded growth forecasts to 1.2% in 2017 after growth accelerated in the latter half of 2016. However, despite some encouraging news on the domestic front the Japanese market as been a casualty of the stronger Yen which hurt sentiment towards its export led economy. Nevertheless, the latest Bank of Japan Tankan index showed growing confidence amongst businesses of all sizes.
Furthermore, it is hoped the tight labour market (Japan has a shrinking population) will bring upward pressure on wages and consumer prices and allow the country to escape from 2 decades of deflation.
India is the market which continues to attract the greatest interest from investors (the IMF predicts 7.2% for 2017). The demonetisation exercise appears to have been less disruptive than feared and the long term outcome should be positive. Growth forecasts have held up despite these disruptions and remain attractive on the back of favourable demographics.
China is still recording strong growth in both exports and imports but markets have lagged on liquidity worries and poor performance of recent IPOs. The People’s Bank of China has avoided open market intervention raising concern that growth will slow.
Emerging Markets, particularly those with close links to the US, could still face challenges if Trump proceeds with trade barriers and reverses the ‘globalisation’ process from which they have been recognised winners.
Conclusions and prospects for stock market investors
The first quarter has brought no major shocks for investors but we acknowledge that current valuations are quite demanding, particularly in the US where double digit earnings growth in the current corporate reporting season will probably be required to impress and justify these ratings. There has unsurprisingly been a pick up in investor interest in less expensive markets, notably Europe, Japan and some Emerging Markets.
There remain, as ever, plenty of unknowns, not least the progress of the Brexit negotiations, and no doubt there will be bumps along the way. Indeed at the time of writing an unexpected General Election has been called in the UK for June causing some jitters amongst investors. However, history shows it is best to hold your nerve and not to panic or try to predict political outcomes. Indeed spells of volatility can bring opportunities for patient investors to drip feed money into the market or even take a contrarian view and buy on the dips.
As we have seen, different markets and sectors can deliver quite diverse performance. Willis Owen offers you a wide selection of Funds from around the globe and tools to help you narrow down your choices. Whether you prefer simple low cost passives or active Funds which employ the skills of an experienced Fund Manager you can easily build a diversified portfolio to match your attitude for risk.
*International Monetary Fund
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