Quarterly market summary

Transcription

1 Quarterly market summary 4th Quarter 2016 Economic overview Economies around the world appear to be relatively resilient, with data signalling that in many countries, economic activities are expanding at a faster pace than was previously believed. Most commentators believe that the policies of president-elect Donald Trump will encourage further strength in the US economy, which could spread to other countries. There is, however, some concern that he may impose measures that could dampen global trade. In the meantime, a widely anticipated quarter-point US interest rate increase took place in December, with three more upward moves from the Federal Reserve now expected in Elsewhere, other central banks hinted that their asset-purchase programmes may be reaching completion, with support for their economies shifting to tax cuts and more public spending. Real GDP growth (%) World UK US Euro 12 Japan estimate 2017 forecast Source: Consensus Forecast, Dec 2016 Market overview There was a significant shift in investor sentiment during the final quarter of In late summer, investors had begun to question widely held assumptions that interest rates, economic growth and inflation would all stay low and this process accelerated towards the end of the year, encouraged by the election of Donald Trump as US president and his anticipated pro-growth policies. Expectations that taxes and regulations would be cut, leading to greater economic activity but higher inflation and interest rates, contributed to a major switch out of bonds into company shares (equities), with several major stockmarket indices hitting all-time highs. Bond markets, on the other hand, experienced significant declines. Equity market performance v. FTSE World Index (4th quarter 2016) Asia Pacific (ex Japan) (6.1) Japan (1.8) Europe (ex UK) (2.1) North America 2.1 UK (3.0) Emerging markets (6.1) (8.0) (6.0) (4.0) (2.0) (%) Source: Thomson Reuters Datastream Sterling

2 UK equities The UK stockmarket sustained its strong recovery from the temporary Brexit-induced weakness that it suffered after the shock referendum result in June, with the FTSE Index finishing 2016 at an all-time high. The performance of many multinational companies represented in the index continued to be supported by further falls in the value of the pound relative to the US dollar. Furthermore, sharp rallies in the prices of oil and metals benefited the producers of such commodities, while bank stocks were boosted by an improved outlook for the financial sector. On the other hand, the more domestically oriented FTSE 250 Index, while still generating a positive return, lagged the FTSE. UK equity market indices (12 months to ) FTSE All-Share FTSE Mid 250 FTSE Small Cap FTSE Source: Thomson Reuters Datastream Rebased to UK bonds In the final quarter of 2016, sentiment towards bonds weakened and some of their gains from earlier in the year were offset as yields moved higher. UK government bonds in particular were negatively affected by a pick-up in inflation expectations due to higher import costs following the sharp drop in sterling since the UK s referendum on membership of the European Union (EU). Uncertainty surrounding the UK s future relationship with the EU also appeared to weigh on UK government bond markets. Given their greater sensitivity to movements in interest rates, longer-dated UK government bonds underperformed those issues with a shorter repayment period, with short-dated UK government bonds holding up relatively well. While credit spreads on UK corporate bonds were little changed overall, the rise in government bond yields meant that these assets also lost ground over the quarter. Gilt indices (12 months to ) 135 Under 5 years 5 to 15 years Over 15 years Source: Thomson Reuters Datastream Rebased to UK property After a fall in capital values of 4% in the third quarter, UK commercial property has been surprisingly resilient recently. Following a small increase in October, capital values grew by 0.5% in November. Post referendum, the industrial sector has outperformed other sectors, with values supported by a lack of good-quality property. Capital values fell by 3.0% between January and the end of November 2016; however, including rental income which continues to grow, albeit modestly the total return for All UK commercial property was 1.6%. While the UK commercial property market appears to have stabilised, several risks remain, including the start of Brexit negotiations. The stance therefore is one of caution, as events in 2017 may put capital values under pressure again. Equivalent yields (to ) (%) All Property Retail Office Industrial Source: IPD 2 Quarterly Market Summary

3 International bonds The surprise election result in the US saw global bonds generally react negatively as investors weighed how US government debt and inflation might increase if the incoming Trump administration implements big infrastructure spending and tax-cutting policies, as it has indicated. OPEC s agreement to lower oil output towards the end of November added to the negative sentiment, with government bond yields rising significantly over the quarter. Given their greater sensitivity to movements in interest rates, longer-dated government bonds underperformed those issues with a shorter repayment period, with short-dated UK and German government bonds holding up relatively well. While credit spreads on corporate bonds were little changed overall, the rise in government bond yields meant that these assets also lost ground over the quarter. 10-year government bond markets (12 months to ) Germany UK US Japan Source: Thomson Reuters Datastream Rebased to Local currency North America US stockmarkets performed well during the three months under review, hitting several record highs. Demand for shares was boosted by the surprise election of Donald Trump as US president, in anticipation of possible moves to cut taxes, reduce regulation and increase infrastructure spending. The Federal Reserve finally raised interest rates by 0.25% and now expects to implement three more increases in Higher borrowing costs are expected to benefit financial companies and US banks experienced significant gains over the quarter. Although the technology-heavy Nasdaq index rose, it lagged the other indices, with some investors questioning the very high valuations attached to many of the constituents. FTSE World North America Index (12 months to ) Source: Thomson Reuters Datastream Rebased to Europe European financial markets performed surprisingly well during the fourth quarter, against a background of increasing political uncertainty and worries about the health of Italian banks. In the event, the rejection of constitutional reform in Italy, which led to the resignation of the prime minister, was met with little reaction and, while the financial situation at Banca Monte dei Paschi di Siena remained critical, it appears that the Italian government will find a way to support the bank. The Italian stockmarket in fact delivered the highest return in Europe, rallying strongly after the referendum. Elsewhere, markets in the region were supported by the European Central Bank extending its bond-buying programme to the end of FTSE World Europe (ex-uk) Index (12 months to ) 80 Source: Thomson Reuters Datastream Rebased to Quarterly Market Summary 3

4 Japan Japanese shares rose sharply during the quarter in local terms, although the weakness of the yen reduced the returns to sterling-based investors. As is usually the case with Japanese shares, the weakness of the currency acts as a big stimulus, increasing the potential earnings of the country s many exporters. The election of Donald Trump caused a further surge in the value of the US dollar relative to the yen as the president-elect is expected to introduce pro-growth policies that could lead to higher inflation and interest rates. Investor sentiment was further boosted by the Bank of Japan keeping its asset-purchase programme unchanged, suggesting that the country s economy is stabilising. FTSE World Japan Index (12 months to ) Source: Thomson Reuters Datastream Rebased to Pacific Basin Ex-Japan Higher interest rates in the US and the consequent strengthening of the US dollar against most other currencies was reflected in a dampening of investor sentiment towards many company shares in the Asia Pacific region in the fourth quarter. There was increasing concern that developing countries could face capital outflows due to the stronger US currency, an idea given greater credence by the election of Donald Trump. The stockmarket of Hong Kong was among the laggards in the area. Investors also became concerned about reported attempts by the Chinese government to curb speculation in the country s stockmarket. On the other hand, the resource-rich Australian stockmarket benefited from the rally in commodity prices. FTSE All World Asia Pacific ex Japan (12 months to ) Source: Thomson Reuters Datastream Rebased to Emerging markets Emerging markets were mixed during the final quarter of While markets in several countries, such as Russia and Brazil were positively influenced by the rally in commodity prices, others came under pressure from the perception that a stronger US dollar could lead to investors withdrawing their money from previously higher yielding areas. Among individual countries, India was adversely affected by the surprise decision to withdraw high-denomination bank notes, while Mexico was seen as a loser from Donald Trump s election as US president. China was also weak, with investors becoming concerned that Beijing would increase the regulation of stockmarket investments. MSCI Emerging Markets (12 months to ) Source: Thomson Reuters Datastream Rebased 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. 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: 4 Quarterly Market Summary

5 Market data 4th Quarter 2016 % 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 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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