Quarterly market summary

Transcription

1 Quarterly market summary 2nd Quarter 2018 Economic overview There was increasing evidence over the quarter that global economic growth seems to be moderating somewhat albeit from high levels seen in 2017 and becoming less synchronised. Despite this, corporate profitability is holding up well. Throughout the major economies, interest rates were left unchanged, with the exception of the US. In mid-june, on the back of a bullish assessment of the economy, the US Federal Reserve raised rates by a quarter of a percentage point and indicated two further hikes in Significant developments during the quarter were the strength of the US dollar buoyed by US interest rate dynamics and concerns about softer economic growth elsewhere in the world and the oil price, which rose despite oil producers agreeing to increase production. Real GDP growth (%) World UK US Eurozone Japan 2017 Forecast 2018 Forecast 2019 Source: Bloomberg Consensus Global Rate Forecasts, 2 July 2018 Market overview The second quarter was an eventful period, with several bouts of volatility in stockmarkets. Politics was on many investors minds, with elections in Italy, Russia and Turkey. In the UK, uncertainty over Brexit continued. Investors were also preoccupied by weaker economic data out of Europe and Japan, and escalating tension between the US and several of its trading partners following the imposition of trade tariffs. Despite the volatility, most stockmarkets rose over the quarter. Notable exceptions included emerging markets such as Brazil, Chile and Turkey. In terms of sectors, cyclical areas such as technology and energy were in favour, while others, such as financials and industrials, lagged. In fixed income, government bond markets were broadly unchanged over the quarter. Equity market performance v. FTSE World Index (2nd quarter 2018) Asia Pacific (ex Japan) (4.9) Japan (3.9) Europe (ex UK) (3.8) North America 2.9 UK 2.0 Emerging markets (9.3) (10.0) (8.0) (6.0) (4.0) (2.0) (%) Source: Thomson Reuters Datastream Sterling

2 UK equities The UK stockmarket made impressive gains over the quarter. Both the FTSE Index (comprising large, mainly multinational companies) and the FTSE 250 Index (made up of mid-cap, more domestically orientated companies) reached all-time highs. Performance was driven by a fall in sterling which boosted the earnings of companies that generate profits overseas alongside some prominent merger & acquisition activity, including Sainsbury s proposed merger with Asda. Share prices advanced despite some business leaders warning on the lack of clarity over the terms of EU exit. Economic growth was also disappointing with the gross domestic product barely increasing in the first quarter, according to the Office of National Statistics. Unsurprisingly, given the economic uncertainty, the Bank of England left interest rates unchanged. UK equity market indices (12 months to ) FTSE All-Share FTSE Mid 250 FTSE Small Cap FTSE UK bonds UK government bonds (gilts) were broadly unchanged over the quarter, although this masks occasional volatility. For example, in May, when political turmoil in Italy struck, gilts rallied along with debt issued by other countries perceived as safe-haven assets. It had been widely anticipated that the Bank of England would raise interest rates during the quarter; however, disappointing gross domestic product data growth fell to its lowest rate in five years and ongoing uncertainty over Brexit appear to have held back the pace of expansion. Some investors now expect interest rates to be raised in August. Index-linked gilts were broadly unchanged over the quarter against a backdrop where inflation continued to trend lower. Gilt indices (12 months to ) Under 5 years 5 to 15 years Over 15 years UK property UK commercial property generated a reasonably strong total return in the first half of However, gains are somewhat smaller than for the same period in Capital value and rental value growth continue to be strongest in Industrials, whereas capital values fell in the Retail sector, reflecting the challenging trading environment for stores. Looking ahead, UK commercial property is expected to generate a mid-single-digit total return in 2018, with rental income representing a significant proportion of returns. The investor market remains healthy, buoyed by overseas demand, following the decline in sterling. Within the market, investors are attracted to quality assets that display resilience, provide increasing rental income, and have the ability to adapt to an evolving economy. Equivalent yields (to ) (%) All Property Retail Office Industrial Source: IPD 2 Quarterly Market Summary

3 International bonds Sentiment towards international bonds ebbed and flowed throughout the quarter. However, the yield on bellwether issues such as 10-year US Treasuries ended the quarter broadly unchanged. Early on, easing tensions between the US and China and solid corporate earnings meant a risk on sentiment prevailed, and high yield bond markets generally performed well. Later in the quarter, political turmoil in Italy led to a sharp fall in Italian government bonds, while US Treasuries, German bunds and UK gilts all benefited from perceived safe-haven status. In contrast, it was a difficult period for emerging market bonds (particularly local currency debt) as a stronger US dollar and higher US interest rates dampened appetite for the asset class. 10-year government bond markets (12 months to ) Germany UK US Japan Local currency North America The US stockmarket rose over the quarter, buoyed by a bumper firstquarter earnings season, with most sectors delivering double-digit earnings growth. Within the market, technology stocks were in favour and the Nasdaq reached a record high. In June, the Federal Reserve lifted interest rates by 25 basis points to 2.0% and signalled that two more increases were likely in The US economy is in robust shape, with growth accelerating and rapid job creation. The Republicans US$1.5 trillion tax-cutting package and US$300 billion federal spending increases have fuelled a further pick-up in the US economy, overshadowing global hazards, including the risk of a Trump-induced trade war. FTSE World North America Index (12 months to ) 120 Europe Despite some significant volatility, most European stockmarkets ended the quarter in positive territory, with the notable exception of the Italian stockmarket. Having made a solid start in April on the back of robust corporate earnings, share prices fell sharply in May, as the prospect of a coalition government made of anti-establishment parties in Italy unsettled investors. However, Italy finally managed to form a new government, thus avoiding a fresh election; this triggered a small relief rally for stocks. The euro struggled throughout the quarter, held back by disappointing economic data the eurozone economy registered its slowest growth in 18 months and dovish comments by the European Central Bank, indicating that interest rates were unlikely to rise before the end of summer FTSE World Europe (ex-uk) Index (12 months to ) Quarterly Market Summary 3

4 Japan Japanese shares made only modest gains in local currency terms in the second quarter, with the stockmarket facing several headwinds, most notably worries about a US-China trade war and a stronger yen. The yen s perceived status as a safe-haven currency lifted its value against many major currencies, with the exception of the US dollar. A stronger Japanese currency can reduce the value (in yen terms) of the overseas revenues and profits of Japanese companies. Meanwhile, the share prices of some industrial and manufacturing companies fell on fears President Trump s trade tariffs would damage exports. With inflation well below the Bank of Japan s target and the economy contracting in the first quarter of 2018, the central bank left interest rates unchanged. FTSE World Japan Index (12 months to ) 120 Pacific Basin ex-japan Stockmarkets in Asia Pacific were turbulent over the quarter, but ended the period in positive territory. Stocks pared initial gains as rising trade tensions between the US and China triggered investor risk aversion in June. The strengthening of the US dollar and higher US interest rates also dampened sentiment towards Asian assets. The smaller markets in southeast Asia, notably Indonesia and Thailand, were the weakest. Korea and Singapore were hurt by concerns about the impact of a potential global trade war. In contrast, Australia and India were among the best performers. China s stockmarket was relatively resilient, supported by robust economic data. FTSE All World Asia Pacific ex Japan (12 months to ) Emerging markets Emerging markets declined during the quarter, extending their retreat from recent highs and underperforming developed market stocks. A stronger US dollar and higher US interest rates dampened investors enthusiasm for the asset class, as US assets became more attractive. Rising trade tensions between the US and China also increased risk aversion. Turkey was one of the weakest markets, hit by a steep decline in the Turkish lira and concerns about the country s financial position. Concerns about the economy and the forthcoming presidential election weighed on Brazil s stockmarket. In contrast, Chinese stocks benefited from robust economic activity. Colombia and India were also among the best performers. MSCI Emerging Markets (12 months to ) Please note that the views on markets expressed in this report are those of M&G as at and should not be taken as investment recommendations. Past performance is not a guide to future performance. The value of investments, and the income from them, will fall as well as rise and you may not get back the original amount you invested. 4 Quarterly Market Summary

5 Market data 2nd Quarter 2018% 12 months to % Local Sterling Local Sterling Equity index total returns* FTSE World FTSE All World ex UK FTSE All-Share FTSE FTSE Mid FTSE Small Cap FTSE World Europe (ex UK) FTSE World France FTSE World Germany FTSE World Italy FTSE World Spain FTSE World North America S&P 500 Composite Index FTSE World Japan Nikkei FTSE All World Asia Pac (ex Jp) FTSE Australia FTSE China (All Cap) FTSE Hong Kong FTSE Korea FTSE Singapore FTSE Thailand MSCI Emerging Markets MSCI Brazil MSCI Argentina MSCI Mexico MSCI South Africa Bond index total returns* FTSE Actuaries UK Conventional Gilts All Stocks Index UK gilts under 5 years UK gilts 5-15 years UK gilts over 15 years FTSE Actuaries UK Index-Linked Gilts All Stocks Index iboxx Non-Gilts Index Salomon World Govt Bond Index yr benchmark bond returns* Yield as at (%) UK US Japan Germany France Currency changes vs sterling Exchange rate as at Q-Q chg % Y-Y chg % Dollar Euro Yen Interest rates Rates as at (%) UK base rate US Fed Funds rate ECB base rate Commodities Price level as at Oil (Brent crude) US$ per barrel Gold bullion US$/troy oz 1, Comm Research Bureau Index * Returns include income Source: Thomson Reuters Datastream All data is sourced from M&G unless otherwise stated. Past performance is not a guide to future performance. The value of investments, and the income from them, will fall as well as rise and you may not get back the original amount you invested. Currency exchange fluctuations will have an impact on the value of your investment. For definitions of the investment terminology used within this document please see the glossary at: Quarterly Market Summary 5

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