Quarterly market summary 2nd Quarter 2017 Economic overview Economic indicators, such as employment statistics, manufacturing activity and company profits, seem to indicate that the global economy is recovering steadily. However, recent data from the US was somewhat disappointing, although not weak enough to stop the Federal Reserve (Fed) raising interest rates for the fourth time in the current economic cycle. Inflation remains fairly benign across many countries, notably the US, with the exception being the UK, where prices are rising at the fastest rate since 2013. Towards the end of the review period, central bank commentators appeared to signal that the improving global economy meant that the era of very low interest rates was coming to an end. Real GDP growth (%) 3.5 2.9 3.0 3.0 2.5 2.5 2.0 1.5 1.0 1.8 1.6 1.4 1.6 2.2 2.4 1.7 1.8 1.6 1.0 1.4 1.1 0.5 0 World UK US Euro 12 Japan 2016 2017 forecast 2018 forecast Source: Consensus Forecast, June 2017 Market overview The general improvement in economic data appeared to be reflected in higher demand for company shares (equities) and many stockmarkets delivered robust returns. Over the quarter, the pound rose against several currencies, including the US dollar and Japanese yen, thus wiping out much of the gain from overseas assets for UK investors. Meanwhile, the election result in France prompted rallies in European stockmarkets and the euro. US stockmarkets enjoyed a strong quarter, led by technology companies, although late in the period, the sector suffered steep falls. A number of Asian and emerging markets benefited from an increase in investors appetite for risk. Bond markets delivered positive returns in April and May but declined sharply in June as it appeared that interest rates could be set to rise. The oil price retreated on concerns that production curbs would not hold. Equity market performance v. FTSE World Index (2nd quarter 2017) Asia Pacific (ex Japan) 0.8 Japan 1.0 Europe (ex UK) 4.7 North America (1.4) UK 0.9 Emerging markets 1.9 (2.0) (1.0) 0 1.0 2.0 3.0 4.0 5.0 (%) Source: Thomson Reuters Datastream Sterling
UK equities Prime Minister Theresa May called a snap election in June in a surprise move designed to give her an increased majority ahead of Brexit negotiations. Instead, the UK electorate responded by wiping out the slim majority she had commanded before the election. Despite subsequent uncertainty over the political situation and how talks with Europe will proceed, share prices continued to rise. A stronger pound meant that the FTSE Index, which contains many multinational companies, underperformed the more domestically oriented FTSE 250 Index of medium-sized companies, although both indices reached record highs. Increased risk appetite meant that smaller companies performed even better. UK equity market indices (12 months to 30.06.17) FTSE All-Share FTSE Mid 250 FTSE Small Cap FTSE UK bonds The UK s surprise election, and the even more surprising result, left the government in disarray and posed many questions over the possible outcome of Brexit negotiations. It appears that the decision to leave the European Union is now being reflected in economic data, with the decline in sterling since the referendum result contributing to a big jump in inflation and a slowdown in economic growth. Government bond prices fell during the quarter, although short-dated bonds performed better than those with a longer time until final repayment. While the governor of the Bank of England appears set against raising interest rates, the most recent monetary committee minutes revealed that some policymakers feel higher rates might soon be needed to combat inflation. Gilt indices (12 months to 30.06.17) 90 Under 5 years 5 to 15 years Over 15 years UK property UK commercial property has enjoyed a solid second quarter, despite the outcome of the general election and continued uncertainty surrounding Brexit. Total returns from the asset class are being driven by both growth in capital values and stable rental income. The overall resilience of UK commercial property is encouraging, and is due in part to buying by overseas investors following the decline in sterling. Across the different sectors, capital growth is currently strongest in offices and industrials - with the latter supported by firm demand for sheds for national distribution and smaller warehouses close to towns. However, capital value increases in the retail sector were subdued. Furthermore, the retail sector is also seeing little in the way of rental growth. On the other hand, rental growth is strongest in the industrial sector. Equivalent yields (to 31.05.17) (%) 11 10 9 8 7 6 5 4 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 All Property Retail Office Industrial Source: IPD 2 Quarterly Market Summary
International bonds The reduction in political risk in Europe resulted in weaker demand, and in turn, lower prices, for government bonds from the likes of France and Germany, although the strength of the euro meant that they registered positive returns in sterling terms. Similarly, US Treasuries were adversely affected by the Fed s decision to raise US interest rates by 0.25%. Towards the end of the review period, central banks around the world appeared to be hinting that the era of ultralow interest rates was coming to a close, causing a sell-off in government bond markets. During the quarter, bonds issued by companies performed better than those issued by governments, supported by investors desire for income. 10-year government bond markets (12 months to 30.06.17) 90 Germany UK US Japan Local currency North America US President Donald Trump continued to struggle in his attempts to reform taxation and healthcare, and has yet to be able to boost infrastructure spending. Nevertheless, the Fed increased interest rates again, citing economic strength as the reason, and stockmarket indices reached a series of record highs. For most of the review period, the pace was set by technology companies, whose shares were supported by some very strong financial results. Late in the quarter, however, rising concerns about high prices in the sector led to some big falls for technology shares. Despite this setback, the technology-dominated Nasdaq Index outperformed the broader stockmarket. FTSE World North America Index (12 months to 30.06.17) Europe Investor sentiment in Europe was supported by some robust economic data, good company earnings and, in particular, the election of Emmanuel Macron as the president of France. Mr Macron is widely seen as business-friendly and his victory prompted rallies in European equities and the euro. The results of regional elections in Germany were also positively received. The strength of the euro boosted the returns from European assets to UK investors. Among the best performers during the quarter were the stockmarkets of France and Italy, as well as the banking sector. On the other hand, the continued fall in the oil price kept the energy sector under pressure. FTSE World Europe (ex-uk) Index (12 months to 30.06.17) Quarterly Market Summary 3
Japan The Japanese stockmarket enjoyed a positive quarter, with the weakness of the country s currency boosting demand for shares of the exporters that dominate the economy. Sentiment was also supported by an improvement in economic data and some robust company results. When viewed in sterling terms, however, the returns from Japan were lower, due to the decrease in the value of the yen relative to the pound. The yen s decline was probably due to a reduction in the desire for safe havens, as the election in France was seen as reducing risk. Technology was the best-performing industry in Japan during the quarter. FTSE World Japan Index (12 months to 30.06.17) Pacific Basin Ex-Japan An increase in risk appetite acted as a tailwind for many of the stockmarkets in the Asia Pacific region, with investors encouraged by receding geopolitical fears and improving economic data. As in other regions, the technology sector was the strongest performer during the quarter. In terms of countries, South Korea experienced a robust rally after the election of President Moon, who is expected to improve the way companies are governed. The Chinese stockmarket rose strongly when the country s shares gained entry to a widely followed emerging markets index. In contrast, the Australian stockmarket declined, weighed down by weaker prices for natural resources and weakness in the financial sector following a proposed bank levy. FTSE All World Asia Pacific ex Japan (12 months to 30.06.17) Emerging markets The performance of emerging markets was mixed during the second quarter, with most Asian markets delivering strong returns while South American and Eastern European markets declined. However, currency movements contributed to the divergence in returns. Among the best performers were China, where shares were boosted by their potential inclusion in the MSCI Emerging Markets Index, and Turkey, where President Erdogan cemented his grip on power. The Greek stockmarket also rose, with investors encouraged by progress on financial support for the country. On the other hand, weakness in the oil price weighed on Russian equities, while Brazil suffered when President Temer was accused of corruption. MSCI Emerging Markets (12 months to 30.06.17) Please note that the views on markets expressed in this report are those of M&G as at 30.06.17 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. 4 Quarterly Market Summary
Market data 2nd Quarter 2017% 12 months to 30.06.17 % Local Sterling Local Sterling Equity index total returns* FTSE World 3.1 0.5 19.9 22.9 FTSE All World ex UK 3.3 0.5 20.1 23.4 FTSE All-Share 1.4 1.4 18.1 18.1 FTSE 1.0 1.0 16.9 16.9 FTSE Mid 250 3.0 3.0 22.2 22.2 FTSE Small Cap 3.8 3.8 28.5 28.5 FTSE World Europe (ex UK) 2.9 5.2 22.7 29.1 FTSE World France 3.2 6.0 26.1 33.3 FTSE World Germany 0.4 3.1 26.3 33.5 FTSE World Italy 3.1 5.9 29.2 36.6 FTSE World Spain 0.9 3.6 33.9 41.5 FTSE World North America 2.9-0.9 17.9 21.3 S&P 500 Composite Index 3.1-0.8 17.9 21.3 FTSE World Japan 6.4 1.5 31.9 24.0 Nikkei 225 6.0 1.2 28.6 20.9 FTSE All World Asia Pac (ex Jp) 5.4 1.3 22.4 27.7 FTSE Australia -2.0-5.1 16.1 23.1 FTSE China (All Cap) 7.2 2.7 26.1 29.0 FTSE Hong Kong 7.3 2.8 25.0 27.8 FTSE Korea 12.9 6.2 33.8 38.7 FTSE Singapore 3.2 0.8 17.9 18.6 FTSE Thailand 0.9-1.7 12.9 20.2 MSCI Emerging Markets 6.7 2.4 22.2 27.8 MSCI Brazil -2.5-10.1 21.4 20.8 MSCI Argentina 5.0 1.1 27.7 31.4 MSCI Mexico 3.1 3.3 10.1 15.5 MSCI South Africa 1.3-0.2-0.6 14.3 Bond index total returns* FTSE Actuaries UK Conventional Gilts All Stocks Index -1.3-1.3-0.9-0.9 UK gilts under 5 years -0.4-0.4-0.1-0.1 UK gilts 5-15 years -0.9-0.9-0.4-0.4 UK gilts over 15 years -2.3-2.3-1.8-1.8 FTSE Actuaries UK Index-Linked Gilts All Stocks Index -2.3-2.3 6.7 6.7 iboxx Non-Gilts Index 0.5 0.5 5.3 5.3 Salomon World Govt Bond Index 2.9-1.0-4.1-1.3 10-yr benchmark bond returns* Yield as at 30.06.17 (%) UK 1.2-0.7-0.7-0.4-0.4 US 2.3 0.9-2.8-5.2-2.5 Japan 0.1 0.0-4.6-2.6-8.4 Germany 0.5-1.3 1.4-3.8 1.6 France 0.8 2.3 5.0-4.0 1.4 Currency changes vs sterling Exchange rate as at 30.06.17 Q-Q chg % Y-Y chg % Dollar 1.2990-3.7 2.9 Euro 1.1389 2.7 5.7 Yen 145. -4.5-6.0 Interest rates Rates as at 30.06.17 (%) UK base rate 0.25 0.00-0.25 US Fed Funds rate 1.25 0.25 0.75 ECB base rate 0.00 0.00 0.00 Commodities Price level as at 30.06.17 Oil (Brent crude) US$ per barrel 47.8-9.1-12.5-3.6-0.8 Gold bullion US$/troy oz 1,243.5-0.3-4.0-5.9-3.1 Comm Research Bureau Index -3.9-7.4-7.1-4.4 * 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: www.mandg.co.uk/investor/help-centre/glossary Quarterly Market Summary 5
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