Market & Economic Update GARETH LEWIS Chief Investment Officer LOUIE FRENCH Senior Research Analyst Market Commentary On the whole it was another reasonable month for equities, with emerging markets and commodity sectors leading the way, as oil and basic materials continued to rally. In credit, high yield corporate bonds also benefited from the move in oil prices, whilst the forthcoming European Central Bank (ECB) bond purchase programme offered support for quality corporates against a weaker backdrop for western sovereign bonds. In currency markets, sterling enjoyed a rebound from recent lows, as investors talked down Brexit risks, but in doing so took the shine off overseas equity returns. In the US, the Federal Reserve (Fed) left rates unchanged. It sent mixed messages however over the timing of any future rise, by recognising slowing growth, but at the same time noting tighter labour markets and downgrading global concerns. Indeed subsequent data towards the end of April confirmed the US economy has slowed to its weakest pace in two years, as rising inventories and falling investment in the commodities sector took their toll. Meanwhile the Japanese Central bank surprised investors by declining to adopt new measures to stimulate the economy in spite of weak inflation and consumption data. Instead the Bank of Japan (BOJ) opted to take more time to assess the impact of negative interest rates. In response the yen gained sharply against major currencies and local equity prices fell. The more positive outlook for emerging markets and commodities in part reflect more positive reports from China. They continue to point to a recovery in growth, with retail sales, fixed investment and industrial production data all rebounding. However, concerns remain over the durability of current economic momentum, given the surge in credit and central government fiscal support that has been required to stabilise economic growth at these levels. In April s chart of the month we have highlighted the depreciation of the US dollar versus the strength of gold at the start of 2016. GOLD VERSUS THE US DOLLAR While predicting currency movements can be challenging, particularly given the current market environment, the volume of money that bought into the belief that 2016 would see the normalisation of the US interest rate cycle as its economy strengthened meant that it was inevitable the US dollar would weaken, once the US Federal Reserve reappraised its outlook. Foreseeing this and being generally cautious on the outlook for markets, we initiated a position in gold towards the end of 2015. As the chart shows, this has provided a good hedge in challenging market conditions so far this year. With 2016 set to be another challenging year for markets overall headwinds including China, the EU referendum and the US presidential elections to name a few we have maintained a neutral position on currencies and our current gold position.
Our view asset allocation summary Market & Economic Update General Summary We are watching global monetary policies closely, but we see a growing risk that Central banks are losing control of global markets as policies such as QE become discredited. We may see a shift in focus to fiscal policy action as politicians globally respond to the wealth inequality that recent policies have exacerbated. We believe our current cautious stance remains appropriate. Significant challenges including potential Chinese defaults and currency devaluation loom large, but the timing of these is highly uncertain. After significant de-risking to the asset models in 2015, particularly in the second half, the Asset Allocation Committee decided that there would be no changes at its April meeting. Equities There were no changes to equities in April s asset allocation meeting. Geographically, we remain underweight Asia Pacific, Emerging Markets and North America, overweight Europe and neutral on Japan and the UK. Stimulus and a benign Fed have signalled a shift from Developed Markets to Emerging Market leadership. The sharp turnaround in global equity markets mid-quarter has been driven by further monetary stimulus, Chinese fiscal expansion, as well as a more dovish Fed. However, fundamentals remain against the rally for Emerging Markets and Asian equities being sustained there is a disconnect between markets and the Fed, and weaker Chinese growth is likely in the second half of 2016. Japanese equities are also expected to struggle as the defensive characteristics of the yen have resulted in currency appreciation. US equity is looking expensive, particularly as corporate earnings are deteriorating. The weighting to European equities around Brexit was discussed and the decision was made to leave the weighting as it currently stands. Europe is one of the cheapest markets in terms of valuations currently, and it is believed that once markets have exited this period of adjustment, the US dollar will strengthen over the euro, which will aid European equities. We are cognisant that investment in the UK market exposes investors to commodity prices from the large-cap mining stocks based here, but believe that much of the concern is already in the price. The UK market also offers income in this low-growth, low-inflation environment. Fixed Income At April s Asset Allocation Committee meeting it was decided that the asset models would remain underweight to fixed income at the asset level. Within fixed income, we remain underweight high yield bonds and investment grade credit, in favour of sovereigns. For Germany and Japan, yields are now in negative territory. Increased leverage suggests that US investment grade bonds are exposed to a deterioration in earnings. Recently the rally in high yield bonds has been reminiscent of periods only seen after a deep recession. Bond returns recently have been driven by looser monetary policy. Commercial Property The UK Commercial Property sector has seen a turn in investor sentiment and momentum with January and February both reporting net outflows from open-ended funds. However, closedended property funds have now started to stabilise. UK Commercial Property doesn t look as attractive as it has done in the past, however a decent running yield is still being received from property funds. Commodities A small weighting to physical gold was initiated in October, as it can be seen as a form of derisking amid a potential growth shock and in an environment where we may see further rounds of competitive global currency devaluation. 2
Market & Economic Update North America, UK & Western Eurpoe Overall April was another positive month for developed market equities. In local currency terms and on a total return basis the FTSE ended the month up +1.4%, while the FTSE World Europe ex UK and the S&P 500 returned +1.7% and +0.4% respectively in local currency terms. For sterling investors a stronger month for the pound against the euro and US dollar resulted in returns of +0.3% for the FTSE World Europe ex UK and -1.5% for the S&P 500. Taking a closer look at the UK market April was also a positive month for UK small caps, with the FTSE Small Cap index rising +1.3% on a total return basis. However, the FTSE Mid 250 index was down -0.3%, as gains in the highly weighted financials sector (+2.2%) were offset by falls in the consumer services sector (-3.6%) and a weaker month for industrials (-0.7%). Unsurprisingly the best performing FTSE sectors in April were basic materials (+12.9%) and oil & gas (+6.1%), which were key drivers of the large cap FTSE returns alongside a better month for banks (+5.9%). Meanwhile on the economic front the UK growth outlook remains overshadowed by perceived Brexit risks. Preliminary estimates of first quarter 2016 GDP saw expansion slow to +0.4% over the quarter from +0.6% in the fourth quarter of 2015. While these figures could be revised in later releases, the estimates pointed to a slowdown in both construction and production output, -0.9% and -0.4% quarter on quarter respectively, while the dominant services sector continued its positive momentum rising +0.6% DEVELOPED MARKETS, PERCENTAGE GROWTH, TOTAL RETURN 105 95 90 85 80 FTSE TR S&P 500 TR FTSE World Europe ex UK TR quarter on quarter. The lopsided nature of the UK recovery continues to be highlighted in the latest current account data, with the UK s large trade deficit in goods remaining an external drag on growth and a key topic of debate ahead of June s Referendum on EU membership. In the US, the Federal Reserve left rates unchanged at its latest meeting, but sent mixed messages over the timing of any future rise. The Fed recognised slowing growth, but at the same time noted tighter labour markets and downgraded global concerns. The latest data on the US labour market continued to show signs of tightening, as initial jobless claims fell to their lowest level since 1973 in April, while average earnings were up +2.3% year on year. However, there were weaker economic data released towards the end of April, as first quarter 2016 GDP growth was estimated to have slowed to +0.5% annualised from +1.4% in the previous quarter. While revisions are possible in future data releases, the advanced estimates pointed towards rising inventories and falling investment in the commodities sector as the main detractors. Meanwhile in Europe, initial estimates of first quarter GDP growth surprised on the upside at +0.6%. Although revisions are possible in later data releases, momentum has improved in France and Spain in particular, with growth of +0.5% and +0.8% respectively over the first quarter of 2016. However, the latest figures are met with some caution given the stronger performance of the single bloc in the first quarter of 2015, which wasn t sustained afterwards. Additionally, it is unlikely that we will see an acceleration in growth given the outlook for global growth and ongoing political risks. The Eurozone is also far away from the European Central Bank s 2% inflation target, with headline CPI for April back in deflationary territory at -0.2% year on year. 3
Asia, Japan & the Emerging Markets Emerging Market equities were among the strongest performing asset classes in April, with Brazilian equities up +7.7%, Indian equities up +1.4% and Russian equities up +4.5% on a local currency basis over the month. However, it was a weaker month for Chinese equities, with the Shanghai Composite index down -2.2%, resulting in the headline MSCI Emerging Markets Index returning only +0.6% in local currency terms. Elsewhere in Asia, Japanese equities were volatile in April as shown in the performance chart. Yen strength has been particularly unhelpful and the Topix ended the month down -0.5% in local currency terms, while the headline MSCI Asia Pacific ex Japan Index was flat in local currency terms over the month. On the economic and policy front the Bank of Japan (BOJ) surprised investors at its latest meeting by not adopting new policy measures aimed at tackling weak consumption, low inflation and reversing recent yen strength. Headline CPI inflation and factory prices remain subdued at +0% and -3.8% year on year in March ASIAN & EMERGING MARKETS, PERCENTAGE GROWTH, TOTAL RETURN 110 105 95 90 85 80 75 MSCI AC Asia Pacific ex Japan TR Topix TR MSCI Emerging Markets TR respectively, while retail sales were also down -1.1% year on year in March. Although the BOJ has opted to take more time to assess the impact of negative interest rates, further stimulus fiscal or from the BOJ is appearing increasingly likely. Meanwhile in China, the latest economic reports in April pointed towards a recovery in growth despite first quarter GDP slowing Market & Economic Update to +6.7% year on year as expected. Retail sales were up +10.5% year on year in March, while fixed asset investment increased +10.7% year on year and industrial production beat expectations with growth of +6.8% year on year. However, concerns remain over the durability of current economic momentum, given the surge in credit and central government fiscal support that has been required to stabilise economic growth at these levels. 4
Fixed Income FIXED INTEREST MARKETS, PERCENTAGE GROWTH Market & Economic Update Given the improved sentiment of investors in recent months it was unsurprising that sovereign debt markets were one of the few negative asset classes in April. The Barclays Sterling Gilt Total Return Index returned -1.3%, German Bunds -0.9% and US Treasuries -0.1%. 106 104 102 98 96 Meanwhile in credit markets, high yield corporate bonds benefited from the move in oil prices, while the forthcoming European Central Bank (ECB) bond purchase programme offered support for quality corporates. The Bank of America (BofA) Merrill Lynch Sterling Corporate Bond index returned +0.5% on a total return basis over the month, while the BofA Merrill Lynch Global High Yield Index ended the month up +1.6% in sterling terms and +3.6% in local currency terms (USD) on a total return basis. 94 92 90 BofA Merrill Lynch Global High Yield TR BofA Merrill Lynch Sterling Corporate Bond TR Currencies Despite ongoing uncertainty ahead of June s EU referendum, April was another positive month for sterling, with the pound rising +1.4% versus the euro and +1.9% against the US dollar. As highlighted in the chart of the month, the US dollar has been notably weak in recent months as markets have reappraised the future path of US interest rates. The dollar index was down -1.6% in April and ended the month at its lowest level this year. Meanwhile, the Japanese yen with its defensive currency status continues to present a considerable challenge to policy makers in Japan. The yen was strong again in April, rising +3.1% in sterling terms and +5.1% against the US dollar, driven by a combination of inaction from the Bank of Japan at its latest meeting and record holdings of long yen positions by speculators. CURRENCY RETURNS RELATIVE TO GBP, PERCENTAGE GROWTH 125 120 115 110 105 95 Euro Japanese yen US dollar 5
Commodities Commodity markets produced strong returns again in April, as oil and basic materials continued to rally. The two headline indices, the Bloomberg Commodity Total Return Index and the S&P GSCI Total Return Index were up +8.5% and +10.1% respectively in US dollar terms over the month. In sterling terms this resulted in total returns of +6.5% and +8.1% respectively. As highlighted in previous months, the performances of the two headline indices tend to differ as a consequence of the S&P GSCI Index having a higher weighting to the energy sector. The S&P GSCI Energy sub-sector recorded strong gains in the month of +17.1% in US dollar terms. The main driver of this performance was oil prices (as shown in the performance chart), which rose to their highest level year to date despite the failure of OPEC nations to reach an agreement over supply cuts at their latest meeting. Market & Economic Update Elsewhere, precious metals continued their positive momentum in April, returning +5.6%, as gold, silver and platinum prices all rose. The agriculture and industrial metals sub-sectors also had a positive month, both returning just over +7%. COMMODITIES PERFORMANCE 1 ST - 30 TH APRIL 2016 Index Total Return Level % Change Brent Crude Crude Oil Heating Oil Sliver Gas Oil Soybeans Nickel Aluminum Corn Platinum GSCI Cotton Unleaded Gasoline Cocoa Bloomberg Commodity Index Natural Gas Zinc Lead Sugar Gold Copper Wheat Lean Hogs Kansas Wheat Live Cattle Coffee Feeder Cattle Commodity monthly performance, April 2016. Indices highlighted in orange. Data in the above table in US dollars. 6
Market & Economic Update Hedge Funds Overall April was another positive month for the HFRX sub-indices in local currency terms, with returns ranging from +7.0% to -2.1%. The best performing sub-index was the HFRX Market Directional, returning +7.0%. The worst performing sub-index in April was the HFRX Equity Market Neutral, which returned -2.1%. The headline index, the HFRX Global Hedge Fund index, was up +0.4%. HEDGE FUND RETURNS, TOTAL RETURN 101 99 98 97 96 95 94 93 92 HFRX Global Hedge Fund GBP Property The IPD UK Property Monthly Total Return Index was down -0.2% in March, compared to +0.6% in the previous month. While income returns remained stable at +0.4% capital returns declined -0.6%, reflecting the impact on property valuations of recently announced changes in Stamp Duty Land Tax. The office and retail sectors were both negative in March, with losses of -0.1% and -0.4% respectively on a total return basis over the month, while the Industrial sector was flat on a total return basis over the month. MONTHLY IPD RETURNS* 2.0 1.5 1.0 0.5 0-0.5-1 MAY 15 JUNE 15 JULY 15 AUG 15 SEPT 15 OCT 15 NOV 15 DEC 15 JAN 15 FEB 16 MAR 16 Income return Capital growth *Index data is released mid-month and therefore figures are only available with a one month lag. 7
Market & Economic Update DATASHEET LATEST MARKET RETURNS TO THE 30 APRIL 2016 PERCENTAGE RETURNS FOR MAJOR ASSET CLASS INDICES. Market 1m 3m 6m 2015-16 2014-15 2013-14 2012-13 2011-12 3 Year 5 Year FTSE TR 1.4 4.1 0.1-6.8 6.4 9.3 16.4-2.0 8.4 23.7 FTSE All-Share TR 1.1 3.9 0.0-5.7 7.5 10.5 17.8-2.0 12.0 29.4 Numis Smaller Companies (Ex-IT) TR 1.2 6.2 0.7 1.8 6.0 23.0 24.3 0.0 32.8 65.1 FTSE World Europe ex UK TR 0.3 4.1 1.9-3.9 7.0 14.8 28.1-19.8 18.0 21.2 S&P 500 TR -1.5 3.7 5.9 6.2 24.1 11.0 22.0 7.6 46.3 92.0 Topix TR 2.6 3.6 3.5 0.9 30.9-10.6 26.7 0.9 18.1 50.9 MSCI Asia Pacific ex Japan TR -1.9 7.0 5.1-12.2 22.7-6.8 18.3-7.7 0.5 9.7 MSCI Emerging Markets TR -1.3 10.1 5.4-13.5 18.9-9.2 8.9-10.0-6.7-8.5 BofA Merrill Lynch Global High Yield TR 1.6 6.0 8.8 5.2 8.7-0.9 20.1 6.2 13.3 44.5 BofA Merrill Lynch Sterling Corporate Bond TR 0.5 2.6 4.3 2.7 10.1 0.4 17.1 6.5 13.4 41.4 FTSE All British Government All Stocks TR -1.2 0.0 3.6 4.2 10.7-3.0 6.0 12.8 12.0 33.9 LIBOR GBP 3 Month 0.0 0.1 0.3 0.6 0.6 0.5 0.7 1.0 1.7 3.3 Gold Index 1.8 11.7 18.4 13.4 1.3-19.1-7.2 9.8-7.1-5.2 S&P GSCI TR 8.1 9.7-5.8-25.8-27.7-1.4-5.0-8.2-47.1-53.9 Bloomberg Commodity TR 6.5 7.3 3.3-13.4-17.3-4.9-1.2-17.2-31.9-44.3 FTSE WMA Stock Market Balanced TR 0.1 3.0 2.2-1.0 11.6 5.8 15 1.0 16.9 35.8 FTSE WMA Stock Market Growth TR 0.2 3.5 2.2-1.7 12.0 6.7 16.5-1.0 17.5 35.5 FTSE WMA Stock Market Income TR 0.0 2.3 2.1-0.3 10.7 4.2 12.7 3.3 15.0 33.8 US Dollar -1.9-3.2 5.4 4.9 9.9-7.8 4.3 2.7 6.2 13.9 Japanese Yen 3.1 9.6 18.9 17.3-6.2-12.1-14.5 4.4-3.3-13.7 Euro -1.4 2.5 9.3 7.2-11.2-3.1 3.9-8.4-7.7-12.1 1 Year ending 30 April. Source: Lipper (to 30 April in GBP. Currency movements are vs. sterling.) 8 Market & Economic Update
Market & Economic Update 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. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change. 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 forward-looking 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. 180516-2041 Tilney is a trading name for the following firms: Tilney Investment Management (Reg. No. 02010520), Tilney Asset Management Ltd (Company No. 03900078), Thurleigh Investment Managers LLP (Company No. OC309191), Bestinvest (Brokers) Ltd (Reg. No. 02830297), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706), each of which is registered in England and authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ. Issued by Tilney Investment Management. Tilney Bestinvest Group Ltd 2016. 9