Investment Comment March 2018
5th March 2018
Following record market highs experienced in January, early February saw a stock market correction, after the release of strong US economic data. Global currency, commodity, bond and equity markets all reacted with volatility, but the global economy continues to grow at its fastest pace in seven years with global financial conditions supportive.
In the UK, mortgage lending in January increased by 9.7% year-on-year and mortgage approvals bounced back with the highest approval rate since July according to data released by the Bank of England (BOE). Furthermore, Britain’s stagnant construction sector accelerated in February, with the purchasing managers' index (PMI) for construction up to 51.4 from 50.2, higher than economists initially anticipated. Although this suggests improved consumer confidence, UK Finance, the new trade body for the British finance industry, articulated sluggish growth expectations and the International Monetary Fund (IMF) forecast a growth rate of 1.5% for the UK in 2018, compared to a rate of 2.2% for the eurozone. The Office for National Statistics (ONS) reported a slowdown in British retail sales growth for the twelve months to January 2018, citing pressure on disposable incomes following the fall in the value of Sterling in 2016. However, data from the BOE suggests that pressure on consumers may start to ease this year. Wage growth is expected to increase to 3.1% in 2018, up from 2.6% last year, and should span across all industries. If inflation declines as predicted, the UK could see real wage growth throughout 2018.
In the US, the Bureau of Labour Statistics reported an increase in consumer prices, measured by the consumer price index, of 2.1% year-on-year in January 2018, exceeding market expectations of 1.9%. Furthermore, initial jobless claims in the US fell to the lowest level in a decade, suggesting that the labour market remains tight. These developments reinforced market sentiment that the Fed would need to raise rates at a faster pace than previously anticipated in order to avoid an overheating economy. Investors and economists expect at least three rate rises throughout 2018. However, the remarks to the Senate by the newly elected Chair of the Federal Reserve, Jerome Powell, appeared more soothing, stating that rate increases would be gradual.
The eurozone experienced a reduction in the rate of business expansion from a near twelve-year high, with the purchasing managers’ index declining from 58.8 in January to 57.1 at the end of February. The index for Germany declined towards a three-month low and executives in France also pointed towards a slower rate of expansion. Despite this slowdown, the index remains well above the 50 level, indicating strong expectations for future growth. This view is supported by Eurozone economists, who point to robust private sector performance throughout Europe at the start of the year. The premier of China announced the economic growth target for 2018 to be in line with the 6.5% target of last year, with policy initiatives to be directed primarily at containing financial risk and addressing quality-of-life matters in the country. The Japanese economy grew 1.6% in the fourth quarter of 2017, exceeding the preliminary growth expectations of 0.5%, citing improved year-on-year private consumption and public investment in the country.
Even with the prevalent volatility and uncertainty of the short-term direction of markets, we remain confident about global financial conditions and continue to advise our clients that a well-diversified and fully invested portfolio is the most effective approach to balance systematic risk.