Market & Economic Update Market Commentary July was a positive month for the majority of asset classes, as measures of market volatility remained low and indicators of global growth remained on a firm footing. Asia Pacific and Emerging Market equities continued to lead the way, with a stronger month for global commodity prices and continued US dollar weakness supportive of returns. In developed equity markets, tobacco stocks fell heavily on both sides of the Atlantic following the news that the US Food & Drug Administration is considering regulating nicotine levels in cigarettes. Despite these headwinds, accommodative monetary policy and a positive start to second quarter earnings season helped US equity markets reach new highs. In Europe, the recent strength of the euro, which reached a 30-month high against the US dollar following hawkish comments from the European Central Bank (ECB), acted as a headwind for the competitiveness of European equities, despite solid returns from the banking sector. Chris Godding Chief Investment Officer Louie French Senior Research Analyst For this Chart of the Month, we highlight the impact of ECB monetary policy five years on from President Mario Draghi s famous whatever it takes speech. Five years on from Draghi Whatever it takes GDP (%YOY) 4 2 0-2 -4 With the ECB now appearing ready to gradually withdraw stimulus as the Eurozone economy strengthens, it is easy to forget how far Europe has come from the crisis it faced five years 5 4 3 2 1 0 Euro 10-year yield (%) 4500 4000 3500 3000 2500 2000 1500 Billions ago. Back in 2012, the future of the euro and the European project was very much in doubt, as peripheral countries saw their borrowing costs rise steeply and a number of countries had to apply for bailouts. Fast-forward five years and growth has returned to the Eurozone economy, aided by historical low borrowing costs and the expansion of the ECB balance sheet to over 4 trillion larger than the annual output of Germany. The main question now facing the ECB is over how sustainable the Eurozone s recovery is, with many of the structural issues and debt burdens still unaddressed. -6 08 09 10 11 12 13 14 15 16 17-1 1000 Euro Zone GDP (%YOY) (LH Scale) ECB Balance sheet (RH Scale 2) EURO 10-year yield (RH Scale) Source: Thomson Reuters Datastream/Tilney
General Summary y We remain pragmatically neutral on equities, whilst in bonds we continue to avoid rate sensitivity, favouring short-dated credit risk and overseas exposure through selected fund managers. y Underlying economic measures remain supportive but fading credit impulse and fiscal stimulus in China coupled with cooling global credit and lending conditions could give rise to a pause in markets in the second half of 2017. y Inflation in most parts of the world has been rolling over. Although bond markets are reflecting the reality that the outlook is for simultaneous monetary policy tightening, we believe significant interest-rate hiking is unlikely and would be a serious error in the face of high debt levels, subdued core inflation and weakening credit growth. y Rising real wages remain key to sustainable economic growth, but would be a drag for earnings growth. Asset Class Breakdown: Equities UK EU US Japan Asia-Pac (Dev) EM Fixed Income UK Gilts Foreign Sovereigns Corporate Credit * High Yield Alternatives Absolute Return Property Commodities # Cash -- - N + ++ Zero strategic asset allocation y The table shows our tactical tilts for each asset class. It indicates our view, from very negative to very positive, for a given asset class. Note that some asset classes have a zero strategic asset allocation (indicated in purple), but may be held on a tactical basis (our tactical view for those asset classes is indicated on the scale). The dark boxes indicate our view on the asset class as a whole. This is for information and qualitative guidance only. * Short dated # Gold Source: Tilney as at July 2017
UK, US and Europe y July was a positive month for UK equities, with solid returns from the banking and commodity sectors offsetting weakness in the healthcare sector from the likes of AstraZeneca. On a total return basis, UK large caps returned +1.1% overall in July. After underperforming last month, the more domestically focused UK mid and small-caps outperformed in July, with returns of +2.4% and +2.9% respectively. UK economic releases in the month were mainly positive, as retail sales were boosted by the warmer weather and the first estimate of Q2 GDP was in line with expectations (+0.3%). However, the squeeze on UK consumers remains in place, with average weekly wages (+1.8%) remaining below CPI inflation (+2.6%). y US equities were the outperformers amongst western equity markets in July, with a solid start to the second quarter earnings season and accommodative monetary policy helping US equity markets reach fresh highs. Notably, tech stocks in the US have also now risen above their dot com bubble peak. The S&P 500 produced total returns of +2.1% in local currency terms and +0.6% for sterling based investors. On the macro front, the US Federal Reserve confirmed, as expected, that balance sheet unwinding will start soon, and they held rates as expected following June s rise. This was against the backdrop of inflation running below target and a positive first estimate of Q2 GDP growth of +2.6% annualised. y As highlighted already, European equities were the laggards in July despite solid returns from the banking sector. On a total return basis, the MSCI Europe ex UK index was down -0.2% in local currency terms, but the strength of the euro resulted in returns of +1.6% for sterling investors. On the macro front, the flash estimate of Q2 GDP growth of +0.6% was in line with forecasts and edged the annual growth rate up to +2.1%. There was also positive data from the labour market, as June s unemployment rate of +9.1% was the lowest in eight years. However, improvements in the labour market are not yet showing signs of generating inflationary pressures, with CPI still well below target at +1.3%. The forward-looking PMI indicators, while still positive, have also pointed to the Eurozone losing some of its growth momentum. UK, US & Europe Markets, Percentage Growth, Total Return 116 114 112 110 Return % 108 106 104 102 100 98 Feb Mar Apr May Jun Jul S&P 500 MSCI Europe MSCI United Kingdom Source: FactSet
Asia, Japan & the Emerging Markets y July was another positive month for Asia Pacific and Emerging Market equities, which were supported by a better month for commodity prices, US dollar weakness and the continued positive outlook for global growth. The headline MSCI Asia Pacific excluding Japan and MSCI Emerging Markets indices generated total returns of +5.2% and +6.0% respectively in local currency terms. For sterling investors this resulted in returns of +3.7% and +4.5% respectively. y There were positive contributors across the major emerging markets in local currency terms Brazilian equities (+4.8%), Indian equities (+6.1%) and Russian equities (+4.8%). Chinese equities were also positive again in July and were boosted by better than expected economic data. The mainland Shanghai Composite index returned +3.7% in local currency terms, while Hong Kong s Hang Seng index returned +6.6% in local currency terms. y Japanese equities were also marginally positive in July, with earnings results from the companies that have reported so far broadly in line with forecasts. The TOPIX generated total returns of +0.4% over the month in local currency terms. For sterling investors this resulted in returns of +0.6%. Asian & Emerging Markets, Percentage Growth, Total Return 120 115 110 Return % 105 100 95 Feb Mar Apr May Jun Jul TOPIX TR MSCI AC Asia ex Japan TR MSCI Emerging Markets TR Source: FactSet
Fixed income y After a volatile month for global bond markets in June, total returns in July were marginally positive. In sovereign bond markets, European yields continued to rise following Draghi s speech at Sintra and the release of relatively hawkish minutes from June s ECB monetary policy meeting. In local currency terms and on a total return basis, German bunds were flat overall in July. Elsewhere, US Treasuries (+0.1%) produced marginally positive total returns overall in July, as relatively dovish comments from the US Federal Reserve linked to subdued inflation saw yields end the month close to where they started. UK gilts (+0.3%) outperformed in July after a weak month in June, with June s drop in inflation leading yields marginally lower. Fixed Income Markets, Percentage Growth Return % 107 106 105 104 103 102 101 100 99 Feb Mar Apr May BofA Merrill Lynch Global High Yield TR y In credit markets, sterling corporates had a better month after a notably weak month in June. The Bank of America (BofA) Merrill Lynch Sterling Corporate Bond index returned +0.8% on a total return BofA Merrill Lynch Sterling Corporate Bond TR Jun Jul Source: FactSet basis over the month. A stronger month for energy prices and US high yield helped the BofA Merrill Lynch Global High Yield return +1.7% in local currency terms (USD) and +0.2% in sterling terms.
Currencies y July was another weak month for the US dollar, as the latest scandals and legislative failures of the Trump administration weighed on the currency. The US dollar index was down -2.9% overall in the month, with the euro (+3.4%) and sterling (+1.5%) both rising against the dollar. y As highlighted already, the euro has continued to be strong in recent months as earlier political fears have diminished and economic data releases have been supportive of a more hawkish tone from the ECB. The euro rose +1.9% in sterling terms over the month and ended July at 30-month highs against the US dollar. y Elsewhere, sterling ended July at a 10-month high against the US dollar. However, a year on from the UK s vote to leave the EU, sterling remains at multi-decade lows Currency Returns relative to GBP, Percentage Growth Return % 106 104 102 100 98 96 94 Feb Mar Apr May US dollar Euro Japanese yen versus the dollar and at subdued levels against the euro. In sterling terms, from last June s vote to the end of July, the euro is up +16.7%, the US dollar is up +12.3% and the Japanese yen is up +7.5%. Jun Jul Source: FactSet
Commodities y After a weak second quarter, July was a positive month for commodity market returns. The two headline indices, the Bloomberg Commodity and the S&P GSCI returned +2.3% and +4.6% respectively on a total return basis in US dollar terms over the month. In sterling terms, this resulted in returns of +0.8% and +3.1% respectively. y As highlighted in previous months, the performances of the two headline indices tend to differ because the S&P GSCI index has a higher weighting to the energy sector. After a poor start to the year, the GSCI Energy sub-sector was the strongest performer in July, returning +8.2%, as oil prices strengthened on signs of a drawdown in US inventories and hopes of stricter production controls from OPEC countries. y Elsewhere, Industrial Metals (+3.6%) and Precious Metals (+2.3%) were also positive performers in July, with metal prices boosted by better-thanexpected Chinese growth data and the weak dollar. Commodities Performance 1-31 July 2017 S&P GSCI Unleaded Gasoline S&P GSCI Heating Oil S&P GSCI GasOil S&P GSCI Coffee S&P GSCI Nickel S&P GSCI Crude Oil S&P GSCI Sugar S&P GSCI Brent Crude S&P GSCI Copper S&P GSCI Cocoa S&P GSCI Soybeans S&P GSCI Bloomberg Commodity Index S&P GSCI Gold S&P GSCI Platinum S&P GSCI Lead S&P GSCI Zinc S&P GSCI Silver S&P GSCI Cotton S&P GSCI Aluminum S&P GSCI Feeder Cattle S&P GSCI Corn S&P GSCI Live Cattle S&P GSCI Lean Hogs S&P GSCI Natural Gas S&P GSCI Wheat S&P GSCI Kansas Wheat -15-10 -5 0 5 10 15 Index Total Return Level % Change Source: FactSet
Hedge funds Hedge Fund Returns, Total Returns y July was another marginally positive month for the HFRX Global Hedge Fund index, which was up +0.8% in local currency terms (USD) over the month. y Returns for the HFRX sub-indices were mainly positive in July, with the HFRX Event Driven topping the performance chart with returns of +1.0%. HFRX Merger Arbitrage was the laggard over the month, returning -0.1%. Return % 102.5 102.0 101.5 101.0 100.5 100.0 99.5 Feb Mar Apr May Jun Jul HFRX Global Hedge Fund GBR TR Source: FactSet Property Monthly IPD Returns* y June was another positive month for the IPD UK Property Monthly Total Return index. Following returns of +0.8% in May, the index was up +1.0% in June. y While income returns were unchanged at +0.5%, capital returns increased from +0.3% to +0.5% in June. y Income returns were a consistent positive contributor to returns in 2016 and this trend has continued in 2017. Forecasts for property total returns overall in 2017 are mid-single digit, with the majority of returns expected to come from income. 1.5 1 0.5 0-0.5-1 Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Capital growth Income return Source: FactSet *Index data is released mid-month and therefore figures are only available with a one month lag.
Datasheet latest market returns to the 31 July, percentage returns for major asset class indices. Assets 1 month 3 month 6 month 2016-17 2015-16 2014-15 2013-14 2012-13 3 Year 5 Year MSCI United Kingdom TR 1.1 3.3 6.3 14.0 4.4 2.3 5.3 21.8 21.8 56.2 Numis Smaller Companies TR 2.9 2.7 12.1 23.8-1.3 13.3 10.2 40.4 38.5 114.3 S&P 500 TR 0.6 2.2 4.5 16.9 24.1 20.3 5.0 29.2 74.5 136.8 MSCI Europe ex UK TR 1.6 5.7 13.7 24.2 6.8 10.2 4.3 36.5 46.2 108.1 MSCI Emerging Markets TR 4.5 8.3 13.8 26.2 17.1-5.9 3.9 5.7 39.0 52.7 MSCI Asia Pacific ex Japan TR 3.7 8.0 13.8 25.7 17.6-1.2 7.3 11.4 46.0 74.5 Topix TR 0.6 4.8 4.6 16.8 15.7 17.7-0.2 29.0 59.1 104.8 BofA Merrill Lynch Sterling Corporates TR 0.8 0.8 4.4 2.4 12.7 7.6 5.9 5.6 24.2 38.9 BofA Merrill Lynch Global High Yield TR 0.2 1.3 1.3 12.2 23.8 4.9-1.6 15.6 45.7 65.8 Gold Index 0.6-1.7 0.3-5.2 44.7-8.1-12.0-16.2 26.0-7.1 S&P GSCI TR 3.0-0.9-9.1 6.0-8.5-38.0-10.5 4.0-39.9-44.1 Bloomberg Commodity TR 0.8-1.2-7.7 1.5 8.2-22.4-8.9-9.5-14.8-29.7 HFRX Global Hedge Fund GBP 0.8 1.0 2.2 3.9-4.9-0.2 3.4 6.1-1.3 8.3 US Dollar -1.5-1.9-4.6 0.7 17.5 8.2-10.2 3.3 28.1 18.8 Japanese Yen 0.2-1.0-2.8-6.6 42.1-10.2-14.1-17.9 19.2-16.0 Euro 1.8 6.3 4.1 6.2 19.0-10.7-9.5 11.4 12.8 13.8 Source: Lipper (to 31 July in GBP. Currency movements are vs. sterling).
Important information The value of your investments, and the income derived from them, can go down as well as up, and you can get back less than you originally invested. Any indication of past performance or quoted yields is not an indicator of future returns. Before investing in funds, please check the specific risk factors on the key features document or refer to our risk warning notice, as some funds can be high-risk or complex, or can be susceptible to risks particular to the geographical area or industry sector in which they invest. Gold, technology and other focused funds can suffer as the underlying stocks can be more volatile and less liquid. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change. The property market can be illiquid; consequently, there can be times when investors will be unable to sell their holdings. Property valuations are subjective and a matter of judgement. Any research or analysis contained in this document has been undertaken by us for our own use and may be acted on in that connection. The contents of the document are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. The document may include forwardlooking statements which are based on our current opinions, expectations and projections. It is provided to you only incidentally, and should not be considered a personal recommendation or advice to invest. Any opinions expressed are subject to change without notice. Issued by Tilney Investment Management Services Limited (Reg. No: 02830297), which is authorised and regulated by the Financial Conduct Authority. Financial services are provided by Tilney Investment Management Services Limited and other companies in the Tilney Group, further details of which are available at www.tilney.co.uk. Tilney Group Ltd 2017. 17082100