We have witnessed yet another positive returns quarter for global equities, delivered with low volatility. Indeed, the economic backdrop appears benign for the coming months, and it is the political situation where investors see potential issues.
Inflation rather than deflation seems to be the focus in the short to medium term, although we feel in the long-term cycle that deflationary pressures still linger. As valuations have become more stretched and investors more complacent, market euphoria is clear to see and the last buying ’frenzy’ could be driven by mega takeovers and the last remaining cash pulled from the side-lines.
UK: Economy is performing better, but slowing down
The UK economy has largely continued to perform better than investors have expected, indeed the recent MPC vote showed a definite hawkish shift in its views. It remains a tricky balance to continue to support domestic activity whilst containing the short-term spike in inflation, largely caused by the post-Brexit vote fall in sterling. The consumer is supported by the wealth effect, created by what remains a strong housing market.
More recent data does show a slowing across the economy, and it would be no surprise if the public became more cautious as Brexit gets closer, as the clock is now officially ticking.
The FTSE 100 has gained 1.7%, with the more domestic focused FTSE 250 rising just over 4% on economic optimism. This out performance may be hard to achieve in the coming months as Brexit negotiations start in earnest. The slightly more nervous UK consumer negatively impacted Next, which reported poor trading figures and the shares declined 15% on the quarter. Other negative movers included BT Group, down 12% on accounting issues; Tesco lost 8%; and Pearson continued to struggle with the move to digital and fell 22%.
Amongst the stocks to gain included Fresnillo, up 26%; Unilever, which rose 22% on merger/break-up hopes; Persimmon, which rose nearly 18% on continued UK housing market strength; and Smiths Group, up 12%.
US: The ’Trump effect’ is being moderated
In the US, after the initial fears of heightened protectionism and measures such as a border tax, the reality has been far slower progress, and some policies may stall altogether. This should temper the GDP boost from Trump, who at the same time needs to make cost savings to be able to afford the dramatic rise in defence spending combined with tax cuts, at a time when debt has been inexorably rising.
Meanwhile, the Federal Reserve is on its path to interest rate normalisation and economic growth must surely be capped under this scenario, which makes us sceptical of the US situation at present.
The S&P 500 index has risen 3.8%, whilst the Dow Jones is up 3.5% with the NASDAQ leading the pack, up just over 7%. The rally in the first quarter has been relatively broad based, although as the period progressed, financials gave up some of their strong gains and the weakness in the oil price saw some declines in this group, with technology stocks still leading losses.
Gainers in the period included Arconic, up 43%; Xerox, up 25%; Facebook gained 22%; and Apple rose 21% after robust iPhone sales. The previously high-flying Under Armour has struggled with poor sales and the stock fell over 30%. Other fallers included Hess Corporation, down 26%; Transocean, which lost 17%; Qualcomm, which declined 13%; and Ralph Lauren, 13% weaker.
Europe: Growth in region continues
Despite the environment of heightened political uncertainty, Europe has continued to benefit from the synchronised global upturn. Clearly the ultra-accommodative monetary policy from the ECB has successfully boosted GDP growth and a pick-up in inflation. Growth for the region should now be nearly 2% for both 2017 and 2018 with some impressive growth in manufacturing activity.
It would appear that Elections across the region have yet to have an impact on activity, but it is likely that France will be the main area to focus on in the upcoming quarter. Usually a populist victory would be dismissed out of hand, but the events of 2016 have set a unique precedent!
Continental European markets continued their positive run despite heightened political volatility, with the Euro Stoxx 50 up 4%. In Germany, the DAX was up 4%, in France the CAC 40 was up 3%, and Spain saw a strong rally, up 9%. Major gainers included Banco Santander, up 14%; Telefonica, up 18%; Airbus, which rose 10%; and Adidas was up 17% on the woes of its main competitor, Nike. Amongst the decliners, Statoil fell 10%, EDF lost 15%, BMW declined 7% on concerns about the model revamp, and Novo Nordisk fell a further 9%.
Japan: Business confidence at its highest since 2014
Japan is also seeing the benefits of the global ‘mini boom’ with a recent Reuters survey of business confidence at the highest reading since August 2014. The growth trend of the economy should be exceeded with 1.3% growth in 2017, followed by 1.1% next year. Consumer demand accounts for 60% of total GDP and this remains relatively sluggish, so the currency remains key to boosting the export sector. This has all been good news for the political scene, with Prime Minister Abe achieving a 66% approval rating, a development that is likely help him secure another three-year term and make him the nation’s longest-serving prime minister.
Asian equity markets were broadly positive, although towards the end of the period, growing risk aversion saw the Japanese yen strengthen, and thus the equity market fell. For the quarter the Nikkei lost 1%, China climbed 5%, Australia was only up 1%, while South Korea shook off tensions with North Korea and rose 6%. Stocks on the rise included Asahi Group, up 14%; Korean Air Lines gained 22%; and Fairfax Media was up 18%. On the downside Brambles dropped 25%, Toshiba fell 23% on nuclear concerns, and CNOOC lost 5%.
Emerging markets robust
The emerging markets have also been robust performers with cash inflows offsetting some of the dollar strength headwinds. With the firmer commodity trend, countries such as Brazil have rallied hard, albeit from a low base.
After one of its most severe recessions in history, the last quarter also saw Russia officially move into recovery. Chinese economic data has consistently beaten expectations, but global investors will continue to monitor the debt situation very closely.
Capital International Group