Investment Comment May 2018
11th May 2018
April saw global markets recover from the correction experienced in the first quarter of 2018 reflecting the positive findings from the IMF global economic outlook report, which suggested that the global economic upswing, which began in mid-2016, has become broader and stronger. Global markets are experiencing growth which has not been seen since the bounce back from the Global Financial Crisis of 2008/9. The IMF predicts growth to be on track to reach 3.9% in 2018 and 2019, which is substantially above the initial October 2017 forecast.
In the United Kingdom, both mid-cap and larger companies recovered from first-quarter lows with the MSCI UK mid-cap and large-cap index increasing by 6.2% and 4.6% respectively during April. However, the Office for National Statistics reported a slowdown in UK economic growth, with gross domestic product growth slowing to 1.2% in the first quarter of 2018 from 1.4% in the fourth quarter of 2017. Similarly, UK house prices, commonly used to measure consumer confidence, displayed a sizeable decline in April. The Halifax House Price Index recorded a decline in UK house prices of 3.1% compared to the economist forecast of a mere 0.3% decline and an annualised growth figure of 2.2%, which is below the consensus forecast of 3.3%. Inflation also fell at an increasing rate and faster than the Bank of England anticipated, with a reported UK inflation figure of 2.3% in April, down from 2.7% in February. UK average wage growth came in at 2.8% for the three months to February compared to the 3% forecast but average earnings rose faster than inflation for the first time in over a year. This, combined with a decline in unemployment from 4.7% to 4.2%, sets the stage for potential increases in earnings throughout 2018.
In the United States, markets continued their upward trajectory from the lows experienced in early February with the MSCI USA Index increasing by 0.4% in April. During this time, talks of a trade war between the United States and China dominated headlines, further elevating global market volatility. However, the US economy is flourishing. US core inflation, which excludes food and energy prices, reached the Federal Reserve’s target of 2% and unemployment fell to 3.9% for the first time since the start of the new millennium. Furthermore, the US recorded their largest increase in salaries in eleven years in the first quarter of 2018. The April Purchasing Managers Index survey found a strong increase in private sector output across the US, alongside steep growth in new orders. This was found to be primarily driven by accelerated growth in both manufacturing and service sector firms. This leaves the Fed on track to further increase short-term interest rates this summer.
European markets echo the market improvement experienced by the UK, with the MSCI Europe Index up 2.94% in April. Asian markets also showed improved performance but to a lesser extent, with the MSCI Asian Index up 0.69% and 0.71% when excluding Japan. Emerging markets, however, underperformed with the MSCI EM Index down 0.44% on the month. This can be expected, given the tightening of US policy and a stronger US dollar.
Benchmark Brent crude oil reached $75 a barrel at the end of April for the first time since 2014. The World Bank, in their April Commodity Markets Outlook, forecast prices for energy commodities to jump 20% in 2018, which is a 16-percentage point upward revision from October’s outlook. Agricultural commodities are forecast to increase by 2% this year.
Even with the prevailing uncertainty in global markets, we reiterate our view that investors should take a long-term view on their portfolio returns and continue to communicate to our clients the importance of holding a well-diversified portfolio. The global economy is experiencing ongoing growth and we continue to see attractive opportunities across global asset classes.