Market & Economic Update Welcome to our latest market and economic update, which looks back over the month of May 2018. Market Commentary Global investors had plenty to focus on in May, with a minor sell-off in Emerging Market assets, ongoing China/US trade quarrels, heightened tensions in the Middle East and political dramas in both Italy and Spain. Collectively these events drove a flight to safety by investors in May, particularly in currency and fixed income markets, where German bunds, UK gilts, the Japanese yen, the US dollar and Treasuries were notably strong. The recent strength of the US dollar linked to interest rate expectations has created a number of headwinds in the Emerging Markets, which were amongst the laggards in equity and fixed income markets in May. Unsurprisingly, European banks and peripheral Europe returns were also weak given the political backdrop, with events in Italy taking centre stage. Elsewhere in equity markets, it was a positive month for UK and US markets, with accommodative monetary policy and higher commodity prices helping returns. Chris Godding Chief Investment Officer Louie French Senior Research Analyst In the latest Chart of the Month, we highlight the movements in Italian bond yields after the dramatic formation of a new government. The Italian election results produced clear challenges in terms of forming a new government, with populist parties 5 Star Movement and League Italian 2 year bond movements linked to heightened political risks Yield 3 2.5 2 1.5 1 0.5-0.5-1 seeking to build an unlikely coalition. However, dramatic events followed, with yields initially spiking as reports circulated that the parties wanted 250 billion of Italian debt written off and renegotiations of Italy s EU budget contributions. Yields then rose even higher on 29 May as the Italian Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Source: Bloomberg president blocked the appointment of a Eurosceptic finance minister and fresh elections appeared likely. May ended with a temporary reprieve as a deal was reached to form a government and yields fell. To put these movements into perspective, 29 May saw Italian 2-year bond yields increase by 1.84%. A move of this size has never been experienced by a 2-year bond in any of the G7 economies over the past few decades for which we have data. Italian 2 year debt finished the month at 0.99%, having been as high as 2.75% and starting the month with a negative yield of -0.313%. The wider Italian bond market was down -6.5% (local currency) to put that in context, the worst monthly return experienced throughout the whole of the Eurozone crisis (2011-12) was -5%.
General Summary y There are some signs that economic momentum is fading, with money supply growth and corporate lending activity noticeably lower. We would likely want to see these metrics improve before looking to turn more positive on equities. On the current outlook, there is the potential for markets to cool in the second half of this year on the back of this falling momentum. Despite this, economic fundamentals remain solid, with above-trend earnings growth still coming through and data such as output measures, business surveys and labour market conditions remaining supportive. y Key concerns and watch points include growing protectionism in the US, slowdown in China and policy error from Central banks (monetary) or governments (fiscal). Inflation has been normalising, but is yet to show serious signs of running out of control, though we believe there are asymmetric risks to the upside in the second half of the year. y Within our centrally managed models, the Asset Allocation Committee decided at its March meeting to make some minor amendments to our equity allocations and to reduce property exposures. Within equities, global (developed market) equity has been reduced in favour of emerging market (EM) equity, reflecting our positive view on this region and relatively attractive valuations. Within fixed income, we remain low duration with a preference for US TIPS, short-dated investment grade credit and EM debt, where appropriate.
UK, US and Europe y Supported by a weaker pound, UK equities delivered another month of solid returns for investors in May. On a total return basis, UK large-caps were up +2.7%, UK mid-caps were up +3.1% and UK small-caps were up +0.9%. At the sector level, energy (+5.7%) and materials (+7.1%) were the notable outperformers. Banks and financials had a weaker month and a number of large UK retailers remained under pressure, despite an improvement in the latest retail sales data and UK real wages. y US equities were also positive performers in May despite another strong month for the US dollar. On a total return basis, the S&P 500 index returned +2.4% in local currency terms over the month and +6.0% for sterling investors. At the sector level, it was another strong month for the technology and energy sectors, with Apple, Exxon Mobil and Facebook all notable contributors to returns. US banks were the laggards in May, following moves in the bond market and linked to disappointing revenue growth figures at some leading firms. On the macroeconomic front, it was a largely positive month of data releases (both backward and forward looking), but these UK, US & Europe Markets, Percentage Growth, Total Return 112 110 108 106 104 102 100 98 96 94 92 Dec Jan Feb Mar Apr May S&P 500 MSCI Europe MSCI United Kingdom Source: FactSet were overshadowed by President Trump announcing that the US will be pulling out of the Iran nuclear deal and will be imposing steel and aluminium tariffs on key allies. There were also signs at the end of the month that trade negotiations with China were souring. y European equities were the laggards amongst the developed markets in May, as political developments in Italy and Spain weighed on investor confidence. On a total return basis, the MSCI Europe ex UK index returned -0.6% in both local currency and sterling terms. At the sector level, it was a notably weak month for European banks, which was unsurprising given the risks to the financial stability of Italy and the Eurozone. There was some temporary reprieve late in the month as a deal in Italy was reached to form a government and avoid fresh elections. However, the political calm did not last long, as Spanish Prime Minister Rajoy appeared set to lose a no confidence vote.
Asia, Japan & the Emerging Markets y May was a weaker month for Asian and Emerging Market equities, as a stronger US dollar and geopolitical risks weighed on returns. The headline MSCI Asia Pacific excluding Japan and MSCI Emerging Markets indices generated total returns of -0.4% and -2.2% respectively in local currency terms over the month. For sterling investors this resulted in returns of +2.7% and -0.1% respectively. y In local currency terms, it was a marginally positive month for Indian (+0.2%) and mainland Chinese equities (+0.7%), with a number of China A shares preparing for MSCI inclusion. Russian equities were flat over the month, while Brazilian equities (-10.9%) were notably weak as fresh political scandals emerged and Petrobas shares fell dramatically as the government attempted to end a trucker s strike via lower fuel prices. y Japanese equities were also weaker in May against a strong yen and weaker economic data. The TOPIX returned -1.7% in local currency terms and +2.5% for sterling investors. Asian & Emerging Markets, Percentage Growth, Total Return 112 110 108 106 104 102 100 98 96 94 92 Dec Jan Feb Mar Apr May TOPIX TR MSCI AC Asia ex Japan TR MSCI Emerging Markets TR Source: FactSet
Fixed income y As highlighted already, May was a volatile month for fixed income investors against the backdrop of a sell-off in emerging market assets, China/US trade tensions and ongoing political crises in Europe. y In sovereign bond markets, the sharp sell-off in Italian bonds drove investors to seek out safe haven assets, resulting in positive local currency total returns for UK gilts (+1.8%), US Treasuries (+0.9%) and German bunds (+1.7%). y Credit markets in Europe, the UK and US underperformed their government equivalents in May, as credit spreads widened and government yields fell. In local currency terms and on a total return basis the Bank of America Merrill Lynch Sterling Corporate Bond index returned +0.2% and the High Yield index returned -1.2%. Fixed Income Markets, Percentage Growth 102.5 102.0 101.5 101.0 100.5 100.0 99.5 99.0 98.5 Dec BofA Merrill Lynch Global High Yield TR Jan Feb Mar Apr BofA Merrill Lynch Sterling Corporate Bond TR May Source: FactSet
Currencies y May was another strong month for the US dollar, linked to a solid economic backdrop, interest rate expectations and political uncertainty in Europe. The euro (-3.4%) and sterling (-3.5%) were both down against the greenback, while the broader US dollar index was up +2.5%. y However, the most notable currency movements in the month were in the emerging markets, with the Argentinian peso, Brazilian real and Turkish lira all weakening as economic and political pressures developed in each nation. y The sell-off in a number of emerging market currencies and political uncertainty in Europe boosted the Japanese yen, which is traditionally viewed as a risk-off currency. Currency Returns relative to GBP, Percentage Growth 105 104 102 100 98 96 94 92 Dec Jan Feb Mar Apr US dollar Euro Japanese yen May Source: FactSet
Commodities y May was largely a positive month for commodity market returns despite a stronger US dollar. The two headline indices, the Bloomberg Commodity and the S&P GSCI, both returned +1.4% on a total return basis in US dollar terms over the month. In sterling terms, this resulted in returns of +5.0%. y On the sector level, it was a positive month for most of the S&P sub-sectors, with Industrial Metals (+2.1%) being the notable outperformer as higher prices for nickel used to make stainless steel and electric vehicle batteries drove returns. It was also another positive month for the energy sector (+1.2%), as markets reacted to geopolitical developments in the Middle East and Venezuela. However, oil prices ended the month weaker as speculation grew that OPEC may decide to raise supply targets at its June meeting. y Despite the heightened geopolitical tensions, Precious Metals (-1.0%) were the laggards in May against the stronger US dollar. Commodities Performance 1-31 May 2018 S&P GSCI Nickel S&P GSCI Cotton S&P GSCI Sugar S&P GSCI Natural Gas S&P GSCI Lead S&P GSCI Lean Hogs S&P GSCI GasOil S&P GSCI Brent Crude S&P GSCI Wheat S&P GSCI Heating Oil S&P GSCI Aluminum S&P GSCI Unleaded Gasoline S&P GSCI Bloomberg Commodity Index S&P GSCI Kansas Wheat S&P GSCI Feeder Cattle S&P GSCI Coffee S&P GSCI Platinum S&P GSCI Copper S&P GSCI Silver S&P GSCI Live Cattle S&P GSCI Zinc S&P GSCI Gold S&P GSCI Corn S&P GSCI Crude Oil S&P GSCI Soybeans S&P GSCI Cocoa -15-10 -5 0 5 10 15 Index Total Return Level % Change Source: FactSet
Hedge funds Hedge Fund Returns, Total Returns y May was a month of two halves for the headline HFRX Global Hedge Fund index, which after starting the month positively, ended May down marginally -0.3%. y Returns from the HFRX sub-indices were also largely flat in May, with HFRX Macro/CTA (-0.7%) and HFRX Merger Arbitrage (+0.8%) reversing form from the previous month. 104 103 102 101 100 99 98 Dec Jan Feb Mar Apr May HFRX Global Hedge Fund GBR TR Source: FactSet Property y Commercial property markets continued their positive momentum in April, with the IPD UK Property Monthly Total Return index returning +0.6% for investors. y The breakdown of returns highlighted a monthly decline in capital growth to +0.2%, while income returns remained robust at +0.4%. y At the sector level, the recent trends of strong capital and rental growth in the industrial sector and weakness across UK retail continued the latter characterised by a number of high profile UK retailers announcing store closures and/or attempts to reduce their rental payments via company voluntary agreements (CVAs). Monthly IPD Returns* 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Capital growth Income return *Index data is released mid-month and therefore figures are only available with a one month lag. Source: FactSet
Datasheet latest market returns to the 31 May, 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 2.7 7.3 6.7 5.7 25.7-7.8 5.3 7.8 22.6 39.2 Numis Smaller Companies TR 0.9 6.0 3.0 5.2 23.9-1.6 10.4 19.1 28.3 68.8 MSCI Europe ex UK TR -0.6 0.3-1.0 1.0 35.6-3.7 5.1 14.0 31.9 58.0 S&P 500 TR 6.0 3.7 4.9 11.0 32.4 6.6 22.9 8.9 56.7 109.7 Topix TR 2.5 1.4 3.3 12.4 31.3-1.2 27.9-3.2 45.7 80.4 MSCI Asia Pacific ex Japan TR 2.7 1.4 4.5 12.8 41.7-11.2 15.7-1.4 41.8 61.8 MSCI Emerging Markets TR -0.1-2.3 2.8 11.0 44.2-13.3 10.3-5.4 38.7 44.7 Bloomberg Commodity TR 5.0 7.1 8.6 7.7 10.0-11.2-17.1-7.4 5.2-19.2 S&P GSCI TR 5.0 12.8 15.7 22.1 4.7-22.7-29.0-2.1-1.2-31.2 ICE BofAML Global High Yield TR 2.3 2.0 0.7-0.5 27.3 5.2 7.9-1.2 33.2 42.0 ICE BofAML Sterling Corporates TR 0.2 0.8 0.4-0.2 10.8 3.4 9.1 3.5 14.4 29.2 UK All Gilts TR 1.8 2.8 2.4 0.5 6.8 5.6 10.2 0.5 13.3 25.5 HFRX Global Hedge Fund GBP -0.3-1.5-1.4 0.5 4.7-7.5 1.1 3.1-2.7 1.4 US Dollar 3.5 3.5 1.7-3.0 12.7 4.8 9.9-9.6 14.7 13.9 Japanese Yen 4.3 1.7 4.8-1.3 13.1 17.3-9.9-10.3 31.0 5.9 Euro 0.0-0.9-0.4 0.7 13.9 6.5-11.7-4.8 22.1 2.6 Source: Lipper (to 31 May 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