Global Equity markets advanced in the second quarter of 2018, but volatility returned to the markets. Whilst economic and earnings data remained resilient on the whole, trade war rhetoric resumed towards the end of the quarter. Political uncertainty in Italy and relations with North Korea also dominated the news headlines over the period. In the bond markets, US 10-year Treasury yields rose significantly in April and touched a seven year high in mid-May, before falling back in June, as investors became more risk averse. Crude oil prices continued to rally, with President Trump’s decision to withdraw the US from the Iran nuclear accord contributing to higher prices, despite OPEC announcing plans to boost supply.
The following chart reflects the performance of the MSCI World index, rising 9.3% over the second quarter, in sterling terms.
30/06/2017 to 29/06/2018
The MSCI World is a market cap weighted equity market index of over 1600 stocks from companies throughout the world, although excludes companies in emerging and frontier markets. It is a widely used benchmark to assess how equity markets have performed globally.
US Equities advanced in April & May 2018, supported by ongoing strength in economic and earnings data and this was enough for investors to shrug off their concerns over an escalating global trade war. The oil price rallied strongly on robust demand and rising Middle East tensions. Towards the end of May, the Trump Administration withdrew from the Iran Nuclear deal and also confirmed it would proceed with Steel and Aluminium trade tariffs on Canada, Mexico and the EU. This did unsettle markets, but not enough to outweigh the positive economic data feeding through. The strongest sector in May was Technology with some companies posting double digit returns over the course of the month.
Towards the end of June 2018, volatility returned to the equity markets globally with investors concerned about US trade tensions with China. The first round of tariffs, were implemented on the 6th July 2018.
The chart below highlights the performance of the American Stock Market index S & P 500 over the 12-month period to 29th June 2018 and highlights the market volatility experienced during February and March 2018. Following a strong period of recovery during April and May 2018, further volatility can be seen towards the end of June 2018, although to a lessor extent, when compared to volatility experienced earlier in the year.
The S&P 500 closed at a level of 2718.37 on Friday 29th June 2018, marking the end of Q2 2018. This represented an approximate 12.1% rise over the period.
30/06/2017 to 02/07/2018
Dollar strength returned over the quarter, rallying over April and May 2018, but has eased back in recent weeks as investor concerns surrounding a potential trade war have escalated. The dollar hit a three-week low on Friday 6th July after data showed the U.S. economy created more jobs than expected in June, but a closely-watched inflation gauge, namely wage growth, rose less than forecast and the unemployment rate increased. The dollar had already weakened earlier on Friday 6th July as the United States and China imposed tariffs on each other’s imports, but the dollar’s fall was muted as investors waited for the jobs report.
The FTSE All Share index rose 9.2% over the quarter ending 30th June 2018. Despite the UK stock market remaining out of favour with global investors there were signs of some improvements as international investors further reduced their underweight positions in the UK. Weaker sterling against ongoing dollar strength and merger and acquisition activity helped support the UK equity markets over the period.
Sterling performed poorly as the Bank of England backed away from an interest rate rise during May 2018, following a raft of disappointing economic data, which led to the central bank reducing their economic growth forecast from 1.8% to 1.4% for 2018. With easing Inflation and slower growth, the markets are now generally anticipating that the next rate hike may take place in November 2018, although very recent data may point towards an earlier hike in August. The pound has recovered some ground in recent weeks as traders focused on the increased likelihood of a “soft Brexit” in which the UK and EU retain close trade ties. The very recent shake up of the Brexit cabinet however, has since put some downward pressure on sterling. David Davis and Boris Johnson resigned from office.
The absence of a rate hike was a further positive for UK equities, as it contributed to a renewed decline in the value of sterling against a strong US dollar. As a result, the more internationally exposed large caps outperformed mid cap companies. Ongoing merger and acquisition activity also supported returns over the period.
The chart below highlights the performance of the UK index FTSE 100 over the 12- month period to 29th June 2018 and highlights the market volatility experienced towards the end of June 2018, after a strong rebound during April and May 2018. The FTSE 100 closed at a level of 7,636.93 on 29th June 2018, representing an approximate 4.4% increase over the period.
30/06/2017 to 29/06/2018
European Equities bounced back in April 2018 led by the energy sector amid rising oil prices. The European Central Bank kept monetary policy unchanged during April, in line with market expectations, highlighting that inflation remained subdued and economic data had moderated. Some of the gains in April however were given back in May as political uncertainty in G7 Italy dominated market sentiment. This triggered a sell off in Italian equities and bonds by investors fearing a snap election and the impact it could have on the stability of the wider Eurozone. Investor concerns eventually eased with the formation of an Italian coalition government between the populist Five Star Movement and the League.
In mid- June, the ECB announced that it would end quantitative easing in December 2018, but to the surprise of the markets, it would leave interest rates at current levels at least through the summer of 2019. Compared to highs of late 2017, Eurozone growth has slowed down this quarter and corporate earnings momentum has weakened.
The strength of the Euro currency eroded over the quarter, falling over 5 % against a strengthening dollar, although the euro rose to its highest since June 14 on Monday 9th July as investors bought into riskier assets following favorable U.S. jobs data in the previous week and evidence that trade tensions have not yet dented economic momentum.
The chart below highlights the performance of the European index Euro Stoxx 50 over the 12-month period to 29th June 2018 and again highlights the market volatility experienced during February and March 2018 and more recently towards the end of June 2018. The Index was designed to be a ‘blue chip’ representation of 50 leading companies in the Eurozone. The Euro Stoxx 50 closed at a level of 3395.60 on 29th June 2018, representing an approximate 1.3% decrease over the 12- month period.
30/06/2017 to 29/06/2018
Despite generally weak sentiment during the past three months, the Japanese equity market showed a positive total return of 3.1% in sterling terms for the quarter. Although further uncertainty was created by rising trade tensions, the Japanese yen lost ground against a generally stronger dollar. Much of the quarter was very quiet in terms of Japan-specific news, with investors focused instead on escalations in trade tension between the US & China and increased strains within the European Union. The most important aspect for Japan has been the increased potential for the US to apply tariffs to auto imports, which represent a significant part of Japan’s trade balance.
With investors tending to be wary of taking additional risks during this period of uncertainty, most cyclical areas of the market, such as shipping companies and machinery producers were weaker, while there was clear outperformance from defensive sectors including foods and railways. The continued rising trend in oil prices also had a marked impact on sector performance, pushing up refiners & distributors but holding back consumers of oil such as airlines.
The chart below highlights the performance of the Japanese TOPIX index over the 12-month period to 2nd July 2018 and again highlights those three main bouts of market volatility experienced so far this year. The TOPIX Index closed at a level of 1730.89 on 29th June 2018, representing an approximate 7.3% increase over the period.
30/06/2017 to 29/06/2018
Asia ex Japan equities were firmly down in Q2, with global trade concerns serving to increase risk aversion. The MSCI Asia ex Japan Index generated a negative return and underperformed the MSCI World.
Association of South East Asian Nations (ASEAN) markets were among the weakest index countries while Korea also fell sharply. This was despite positive developments with regards to peace on the Korean peninsula; an Inter-Korea Summit in April saw leaders from the South and North pledge to agree a formal end to the war between the two sides. US President Trump subsequently met with North Korean leader Kim Jong-un in Singapore in June. In Malaysia, the market declined after the unexpected election victory of Mahathir Mohamad’s Harapan alliance ended the ruling coalition’s 60 years in power. Taiwan also underperformed with IT sector names leading the market lower. India, which had underperformed by a wide margin in Q1, and China finished in negative territory but held up better than the wider index.
In China, the central bank cut the ‘triple R’ reserve ratio requirement (RRR) for banks by a total of 1.25% over the quarter to encourage lending and support growth. However, a combination of slowing domestic growth momentum and global trade uncertainty contributed to weakness later in the quarter and the currency depreciated relative to the US dollar.
The total return chart below highlights the performance of the MSCI Asia Pacific index over the 12-month period to 29th June 2018 and in line with other major developed equity markets, highlights the pattern of market volatility experienced so far this year. The Index level increased in sterling terms by approximately 8.1% over the period.
30/06/2017 to 29/06/2018
The EM region also made positive equity returns over the quarter in dollar terms and the MSCI EM index, which is representative of 23 emerging economies, outperformed the MSCI World Index over the quarter. Brazil generated the strongest returns as former president Luiz da Silva saw his criminal conviction upheld. Russia also made gains as their Central Bank cut interest rates by a further 0.25%, following a cut of 0.50% in late 2017, due to signs that inflation would remain low. Indian Equities however struggled, in part due to political instability in the ruling party and investor concerns over a reported fraud at state owned Punjab National Bank in February.
The total return chart below highlights the performance of the MSCI Emerging Markets (GBP) index over the 12-month period to 29th June 2018 and the volatility experienced towards the end of June 2018 has been more pronounced compared to the other developed equity markets referred above. The Index level increased in sterling terms by approximately 6.5% over the period.
30/06/2017 to 29/06/2018
The Bond Markets
Global bond markets suffered from bouts of volatility in the second quarter of 2018 (Q2) due to a confluence of factors. These included a greater dispersion between accelerating US growth and a softening of economic activity elsewhere (e.g. the Eurozone), escalating trade tensions between the US and China and the formation of a populist coalition government in Italy. Global corporate bonds made negative total returns over the quarter, in particular Emerging Market Bonds, impacted by a strengthening dollar.
At a government bond level and after a sustained period of rising yields since September 2017, the following chart covering the 12- month period to the 2nd July 2018, highlights the rise then fall of US 10- year Treasury Yields in the second quarter of 2018. Yields closed at a level of 2.878% on 2nd July 2018. They rose significantly in April, touching a seven-year high in mid-May, as economic growth and inflation expectations continued to build, before investor risk aversion and “safe haven” buying led to a significant fall back in the yield.
Italian 10-year government yields increased from 1.79% to 2.68% as the formation of a populist coalition government in May raised concerns over Italy’s future relationship with Europe. Spain suffered some contagion effect with 10-year government yields rising from 1.16% to 1.32%.
The following chart covering the 12-month period to 2nd July 2018, highlights a similar path or trajectory in the second quarter for UK 10- year Gilts, with yields falling significantly over the second half of the month of May 2018. Yields closed at a level of 1.273% on 2nd July 2018. The 10-year UK Gilt yield fell from approximately 1.36% to 1.27% over the second quarter of 2018.
The Q1 2018 RICS UK Commercial Property Market survey results published last month show a growing divide between the already struggling retail sector and a still healthy backdrop within the industrial sector. What’s more, retail weakness has become more apparent across all parts of the UK over recent quarters. Investment enquiries were still rising in Q1, but interest from overseas buyers was flat across industrial, retail and office sectors.
Capital value growth for UK commercial property as a whole slowed to 0.10% in April 2018, according to property consultant CBRE. This is the slowest rate since October 2016 and was driven by a decline in capital values for Retail property. Industrials again provided a boost to overall results, with capital values increasing by 0.70% and the sector recording a total return of 1.10% for April 2018.
Furthermore, Industrials were the only sector to record rental growth, up 0.20%. The Office sector recorded capital growth of 0.20% and a total return of 0.60% for April 2018 although rental values were flat.
After a good performance in 2017, total returns from UK commercial property over this year and next may well be lower with capital value falls in parts of the market, in particular, the retail sector, where operators will continue to struggle with costs and sale margins. On the flip side to these difficulties however, there is a more positive outlook for industrial commercial property, in particular those properties linked with logistics and distribution. Whilst consumers are increasingly shopping online, processing these orders requires ever increasing distribution capabilities and warehouse facilities.
Given the backdrop of the volatility in the markets during the first and second quarters of 2018, it is important to have a spread of investments to minimise the investment risk and our model portfolios are constructed in order to give access to a wide range of leading fund managers operating in the different sectors around the world. Typically, our portfolios consist of 15 or more collective investment funds and each fund is monitored on a regular basis, in particular to assess the continued suitability of each fund. This entails monitoring the investment performance and volatility of each active fund, in order to assess that they remain competitive and have that potential to enhance longer term returns.
For example, the cumulative performance of the Burton & Fisher model portfolio 5 over the five year period to 29th June 2018 is shown below. The portfolio is suitable for a person with a low medium investment risk profile. The recent volatility seen in the markets during February, March 2018 and June 2018 is placed into perspective in the chart below. Whilst not insulated from the recent volatility in markets, the portfolio has made a respectable return and has outpaced sectors average over period shown.
Burton & Fisher Model 5 – Cumulative Performance
Unless specified otherwise, the performance figures shown in this report are supplied by FE Analytics and only serve to show how the portfolio and wider markets have performed in the past. The past performance data above is based solely on the current allocation of funds and does not reflect changes in funds and allocation over time. Past Performance is not a reliable indicator of future results and the value of investments is not guaranteed and may go up or down. Returns shown above are after fund management charges, but before financial advice and product charges, other charges and taxes where relevant. Price total return performance figures are calculated on a bid price to bid price basis (mid to mid for OEICs) with net income (dividends) reinvested. Performance figures are shown in Sterling unless specified otherwise.
Asset Allocation is based on long-established and well-proven mathematical principles, it involves achieving the correct balance of assets in your portfolio. The universe of investment funds available for you to invest into are categorised under different asset classes depending on their particular focus. Different types of assets have different performance characteristics, so it is very important to allocate the right mixture of funds to your portfolio so that, over time, the peaks and troughs of their performance balance each other out meeting your particular risk and reward expectations.
Burton and Fisher reviews the asset allocation for our clients on a quarterly basis, any changes that we are recommending to the rebalancing of your investment strategy will be communicated to you for your approval. Given the recent volatility in the markets, we are monitoring events closely, but do not feel it is necessary to make any changes to portfolio construction at this time.
The current asset allocation of the Burton & Fisher Model 5 portfolio is shown in the chart below.
Source: Dynamic Planner 03.07.2018
Burton & Fisher Financial Services is authorised and regulated by the Financial Conduct Authority (FCA) in the conduct of investment business. This document is not investment research and you should not treat this guide as a recommendation to buy, sell or trade in any of the investments, sectors or asset classes mentioned. Some of the market commentary has been provided by a selection of our preferred fund managers.
The value of any investment and the income from it is not guaranteed and can fall as well as rise, so that you may not get back the amount originally invested. Past performance is not a reliable indicator of future results.
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