Investment Comment February 2018
2nd February 2018
With many markets hitting record highs at the beginning of January, many commentators were surprised by the rise in volatility experienced at the end of the month through the first week of February. US equities led the sell-off, initiated by fears of accelerated monetary tightening following strong economic data. Global markets followed suit as UK, European and Asian equities all drew down over several days.
With concerns for fixed interest assets mounting as global rates begin to rise, bonds have so far proven an attractive diversifier in this latest uptick in equity market volatility. Collective vehicles holding UK Commercial Property assets have also held their value.
In the UK, wage growth strengthened to its highest rate since December 2016 and labour market conditions remain tight. At 2.4%, wage growth remains below inflation which continues to run around 3%. The data prompted a rise in the value of the pound to $1.42, a post-referendum high. GDP growth in 2017 came in ahead of expectations at 1.8% but remains behind the US and Europe. The IMF downgraded its outlook for UK growth in 2019 from 1.6% to 1.5%, citing continued uncertainty. The Bank of England (BOE) raised its 2018 growth forecast for the UK economy from 1.5% to 1.7%, following a similar upgrade from the National Institute of Economic and Social Research. The BoE governor Mark Carney indicated that interest rates would need to rise ‘earlier and by a somewhat greater extent’ than the Monetary Policy Committee had predicted in November if the economy continues along its current path.
In the US, GDP growth for the fourth quarter of 2017 came in slightly below expectations at an annualised rate of 2.6%. For the year, the economy grew 2.3%, well above the 1.5% seen in 2016. Imports rose at their fastest rate in over seven years, as domestic consumer demand strengthened. In Europe, data released by Eurostat indicated a 2.5% GDP growth rate in the eurozone, the fastest since 2007. Eurozone unemployment fell to a new eight-year low of 8.7%, continuing its steady decline from its 12.1% peak in 2013. Inflation cooled further to 1.3%, falling well below the European Central Bank’s 2% target, giving continued flexibility on the future of the quantitative easing programme still in place.
As speculation on the short-term direction of markets rises, we remain focussed on the long-term drivers of growth. We note that the recent ‘correction’ was initiated by stronger rather than weaker than expected data. We remain positive on the outlook for the global economy, particularly Europe and Asia. Whilst there remains a place in most portfolios for non-equity assets to dampen losses in down markets, we continue to believe that investors with long-term time horizons are best served by holding diversified portfolios with appropriate equity exposure to drive growth.