Market & Economic Update Welcome to our latest market and economic update, which looks back over the month of February 2018. Market Commentary After a prolonged period of low volatility across global markets, early February witnessed an unpleasant wake-up call for global investors. Higher than forecast wage data and increased investor speculation that global Central banks were set to tighten their monetary policies further caused market volatility to spike, which resulted in a rush amongst some global investors to adjust strategies that were reliant on market complacency. Despite a positive second half of the month and continued positive global growth data, most asset classes failed to recover from earlier losses and ended the month in the red. In global equity markets, both developed and emerging markets delivered negative returns for investors. The only notable exception was the return from Japanese equities in sterling terms, following a strong month for the Japanese yen and a weaker month for the UK pound linked to ongoing Brexit uncertainties. It was also a weaker month for commodity markets against a stronger US dollar, while returns for global fixed income markets were relatively benign. Chris Godding Chief Investment Officer Louie French Senior Research Analyst MSCI World Index Level In the latest Chart of the Month we have highlighted how the spike in market volatility, which started towards the end of January, left equity markets looking for love in February. 2400 2200 2000 1800 1600 1400 2016 MSCI World U$ COBE Volatility VIX (RH Scale) After remaining at historic lows for much of 2017, the VIX volatility index spiked in early February and equity markets fell sharply following the release of US wage data that spooked 2017 2018 40 35 30 25 20 15 10 Source: Thomson Reuters Datastream/Tilney 5 CBOE Volatility (VIX) Index level investors with the prospect of an inflation shock. As highlighted last month, a large number of global investors had become complacent over the equity market rally and we believe that a market correction was overdue, given that the stretched bull market had continued moving up in the face of higher oil prices, rising inflation and tighter monetary policy. At this stage, we do not believe a normalised inflation and monetary policy outlook poses a major risk to equities. We have kept our core sovereign bond exposure, which is susceptible to rising inflation, low in terms of weight and duration. Late last year we also added some inflation-linked bonds to our strategy for certain mandates as appropriate.
General Summary y Broad economic momentum continues to drive earnings growth in an environment where monetary policy is expected to remain supportive and inflation is benign. Against this, valuations that aren t cheap, and the gradual withdrawal of ultra-loose monetary policy temper our view. However, it s important to remember the adage that bull markets don t die of old age, and we remain alert for signals of a material deterioration in the outlook. In such an environment, a neutral position in equities remains justified. y Within our equity exposure, we have reduced exposure to the UK where the underlying economic outlook has deteriorated and political risks are elevated. Offsetting this, we have reduced our underweight to the US given the strength of the economic backdrop, expectations for strong earnings growth and potential benefits of tax reform legislation. We remain overweight in Europe. y Amidst incremental monetary policy tightening, sovereign bonds look vulnerable at the long end. Our approach is to remain low duration with a preference for US TIPS, emerging market debt and shortdated investment grade credit.
UK, US and Europe y After recording some of their biggest daily losses in years at the start of the month, US equity markets staged a partial recovery in the second half of February, supported by a large number of share buybacks by corporations. On a total return basis, the S&P 500 index returned -3.7% in local currency terms over the month and -0.6% for sterling investors. At the sector level, the technology sector continued to be a dominant performer, with the likes of Amazon announcing positive results in the month that helped investors rekindle their support for certain parts of the market. Conversely, the consumer staples sector was weighed down by negative earnings announcements by the likes of Walmart, highlighting some weakness in the latest US retail sales data linked to inflationary pressures on consumers, which might be eased by higher US wage growth data in January. y European equities also produced negative returns for investors in February despite a weaker month for the euro linked to ongoing political concerns in a number of countries. On a total return basis, the MSCI Europe ex UK index returned -3.6% in local currency terms and -2.6% for sterling UK, US & Europe Markets, Percentage Growth, Total Return 120 115 110 105 100 95 Sep Oct Nov Dec Jan S&P 500 MSCI Europe MSCI United Kingdom Source: FactSet investors. Notably the German DAX was one of the weakest performing markets in February, despite Chancellor Merkel agreeing a deal to form a coalition government with the Social Democrats (SPD) after months of political deadlock, and solid economic data releases over the month. On the sector level, it was also a weaker month for European financials, as the latest European Central Bank meeting minutes reiterated a wait and see approach. y Despite a weaker month for the pound linked to ongoing Brexit uncertainties, UK equities recorded a successive month of negative returns for investors in February. On Feb a total return basis, UK large-caps were down -3.4%, UK mid-caps were down -2.7% and UK smallcaps were down -3.2%. On the sector level, there were negative returns across the board, with continued weakness for perceived bond proxies such as utilities, while lower commodity prices weighed on the oil & gas sector. The only exception was the consumer discretionary sector, which was marginally positive and largely supported by box office returns from SKY shares following US cable giant Comcast s bid for the company late in the month.
Asia, Japan & the Emerging Markets y Asia Pacific and Emerging Market equities were not immune from the global sell-off at the start of February which weighed on overall returns for the month. The headline MSCI Asia Pacific excluding Japan and MSCI Emerging Markets indices generated total returns of -3.5% and -3.8% respectively in local currency terms over the month. For sterling investors this resulted in returns of -1.7% and -1.5% respectively. y In local currency terms, Chinese equities were notably weak in February, with fewer trading days because of the Lunar New Year holidays. The mainland Shanghai Composite index returned -6.4%, while Hong Kong s Hang Seng index returned -6.0% in local currency terms. Brazilian (+0.5%) and Russian (+1.0%) equities were marginally positive in local currency terms. y After a strong run, returns from Japanese equities were also weaker in local currency terms in February. The TOPIX returned -3.7% over the month in local currency terms, but a stronger month for the Japanese yen despite weaker macroeconomic data resulted in returns of +1.7% for sterling investors. Asian & Emerging Markets, Percentage Growth, Total Return 125 120 115 110 105 100 95 Sep Oct Nov Dec Jan Feb TOPIX TR MSCI AC Asia ex Japan TR MSCI Emerging Markets TR Source: FactSet
Fixed income y Relative to equity markets, returns for global fixed income were fairly benign in February. In sovereign bond markets, US Treasuries (-1.0%) were the laggards over the month. Notably, following the recent spike in yields, the transatlantic spreads between US and German bond yields (2-year and 10-year) are now at multi-decade highs. Closer to home UK gilts produced marginally positive returns of +0.2%, as the Bank of England kept rates on hold at its latest meeting. y In credit markets, wider spreads linked to the spike in market volatility resulted in mainly negative returns across the board. The Bank of America (BofA) Merrill Lynch Sterling Corporate Bond index was down -1.1% on a total return basis over the month. High-yield returns were also negative in local currency terms (-1.3% USD), but up +1.9% in sterling terms. Fixed Income Markets, Percentage Growth 103 102 101 100 99 98 97 Sep Oct BofA Merrill Lynch Global High Yield TR Nov Dec Jan BofA Merrill Lynch Sterling Corporate Bond TR Feb Source: FactSet
Currencies y Sterling ended February weaker, as Brexit talks with the European Union appeared to sour. In sterling terms the euro returned +1.0%, the Japanese yen was up +5.6% and the US dollar was up +3.2%. y After a weak run, the US dollar evidently benefitted from political concerns in the UK and Europe in February, along with the perception of a more hawkish stance under the new Fed Chairman, Jerome Powell. The broader US dollar index returned +2.2% over the month after falling to its lowest level in three years in January. y The notable outperformer in February was the Japanese yen, which was up to its highest level against the US dollar since late 2016. The moves were predominantly attributed to risk aversion and positive speculation by currency traders. Currency Returns relative to GBP, Percentage Growth 102 100 98 96 94 92 90 Sep Oct Nov Dec Jan Feb US dollar Euro Japanese yen Source: FactSet
Commodities y February was a weaker month for commodity market returns after a strong run for investors. The two headline indices, the Bloomberg Commodity and the S&P GSCI, returned -1.7% and -3.3% respectively on a total return basis in US dollar terms over the month. In sterling terms, this resulted in returns of +1.4% and -0.2% 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. The GSCI Energy sub-sector was notably weaker in February (-5.3%), as a stronger US dollar and higher US rig counts weighed on oil prices early in the month. y Elsewhere, it was also a weaker month for Precious Metals (-2.2%) and Industrial Metals (-2.9%) against the strong dollar. The agriculture sub-sector was the only positive performer (+6.4%) in the month and this is reflected in the individual commodity performance chart. Commodities Performance 1-28 February 2018 S&P GSCI Cocoa S&P GSCI Kansas Wheat S&P GSCI Wheat S&P GSCI Cotton S&P GSCI Soybeans S&P GSCI Corn S&P GSCI Sugar S&P GSCI Nickel S&P GSCI Live Cattle S&P GSCI Feeder Cattle S&P GSCI Coffee S&P GSCI Platinum Bloomberg Commodity Index S&P GSCI Gold S&P GSCI Zinc S&P GSCI Copper S&P GSCI S&P GSCI Aluminum S&P GSCI Lead S&P GSCI Crude Oil S&P GSCI Silver S&P GSCI Brent Crude S&P GSCI GasOil S&P GSCI Lean Hogs S&P GSCI Heating Oil S&P GSCI Unleaded Gasoline S&P GSCI Natural Gas -15-10 -5 0 5 10 15 Index Total Return Level % Change Source: FactSet
Hedge funds Hedge Fund Returns, Total Returns y After a strong start to 2018 for the hedge fund universe in January, the headline HFRX Global Hedge Fund index experienced a more volatile month of returns (-2.2%). y The HFRX sub-indices were also volatile in February with a sizable divergence in returns. The outliers were the HFRX Macro/CTA, which was the laggard over the month (-4.2%) after previously topping the performance chart in January. The best performing sub-index was HFRX Convertible Arbitrage +0.4%. 105 104 103 102 101 100 99 Sep Oct Nov HFRX Global Hedge Fund GBR TR Dec Jan Feb Source: FactSet Property Monthly IPD Returns* y Property markets started 2018 in a positive fashion after a year of solid returns in 2017. Following returns of +1.4% in December, the IPD UK Property Monthly Total Return index was up +0.7% in January. y Income returns remained steady at +0.4%, capital growth was more modest at +0.3% in January. 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 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 28 February, percentage returns for major asset class indices. MARKET & ECONOMIC UPDATE 1 month 3 month 6 month 2017-18 2016-17 2015-16 2014-15 2013-14 3 Year 5 Year MSCI United Kingdom TR -3.4-0.5-1.4 3.2 24.2-9.2 5.4 10.6 16.4 35.6 Numis Smaller Companies TR -3.2-2.9-1.4 8.7 21.2-1.8-1.8 32.2 29.4 67.9 MSCI Europe ex UK TR -2.6-1.2-2.2 12.1 27.3-5.2 5.3 16.3 35.1 65.5 S&P 500 TR -0.6 1.2 3.7 5.8 40.0 4.0 25.3 13.6 54.0 119.0 Topix TR 1.7 1.8 6.5 11.4 36.6 2.0 18.8 3.7 55.2 91.1 MSCI Emerging Markets TR -1.5 5.2 3.5 18.3 45.5-14.8 14.3-14.6 46.7 43.3 MSCI AC Asia Pacific ex Japan TR -1.7 3.0 2.4 15.2 43.7-12.1 18.0-10.1 45.5 54.3 S&P GSCI TR -0.2 2.5 6.2-3.4 32.6-29.7-30.5-7.8-10.0-42.3 Bloomberg Commodity TR 1.4 1.4-2.0-8.3 29.9-18.5-16.3-11.1-2.9-27.7 HFRX Global Hedge Fund GBP -2.2 0.5 1.5 2.8 6.4-8.5-0.1 5.7 0.1 5.7 ICE BofAML Global High Yield TR 1.9-1.3-4.9-3.4 34.2 3.4 7.2-1.1 34.1 42.1 ICE BofAML Sterling Corporates TR -1.1-0.4-1.8 1.2 13.4-1.2 12.1 4.1 13.3 32.1 UK Gilts All Stocks TR 0.2-0.4-2.4-1.2 6.1 5.4 11.7-0.8 10.5 22.5 US Dollar 3.2-1.8-6.5-9.7 12.0 10.9 8.4-9.4 12.2 10.2 Japanese Yen 5.6 3.0-3.5-5.3 13.0 17.4-7.4-18.1 25.7-4.7 Euro 1.0 0.5-4.1 3.7 9.5 7.4-11.9-4.3 22.0 2.8 Source: Lipper (to 28 February 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. Underlying investments in emerging markets are generally less well regulated than the UK. There is an increased chance of political and economic instability and the market(s) can be less liquid. 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 2018