Investment Comment April 2018

Over the last two months, market sentiment has become increasingly fragile with global equity markets entering a period of elevated volatility. The US market remained soft throughout March, with the MSCI USA down 5.7%. The VIX index, used to measure the anticipated volatility in US markets, also jumped back above its long-term average but remains below the volatility levels experienced during the February correction. In the UK, both mid-cap and larger companies (MSCI UK large-cap (-1.4%) and the MSCI UK mid-cap (-1.8%)) softened in March. Market performance in Europe displayed similar results to the UK, with the MSCI Europe down 2.3%.

In the US, changes to key members of the Trump Administration, increasing taxes on US aluminium and steel imports and talks of a $60 billion trade agreement between the US and China dominated headlines. News of the departure of Rex Tillerson (US Secretary of State) raised doubts about the Iran nuclear deal and injected uncertainty into oil markets, given that a collapse of the deal would potentially disrupt oil supplies. Furthermore, the departure of Gary Cohn (Chief Economic Advisor) saw the dollar index, a measure of the greenback against a basket of other currencies, decline 0.2% in the European morning after the news. Trade war fears in global markets, sparked by President Trump’s announcement to impose significant tariffs on Chinese industrial exports, have eased after confirmation of a call between the US Treasury secretary and China’s vice-premier to discuss “mutually agreeable” ways to cut America’s trade deficit with China. This news, combined with investors regaining their interest in technology stocks saw US stocks have their largest one-day gain in 2.5 years. The positive sentiment from the US filtered through to Asian and EU markets but was short lived. Increasing concerns over tighter regulation saw markets close the month lower.

March also marked the first interest rate increase by newly elected Chairman of the Federal Reserve, Jay Powell. The Fed target rate increased by 25 bps from 1.5% to 1.75%, a move which had been widely expected by the market. Concerns relating to a tighter Fed policy inducing further volatility in equity and credit markets have eased slightly after core inflation (1.8%) was reported to have remained below the Fed target rate of 2%. In combination with weaker than expected US retail sales data, this reduced the market expectation of four potential rate rises throughout 2018 to three. Durable goods orders in the US increased 3.1% from last month and US new home sales data recorded 618,000 new home sales, slightly below the initial forecast. The Purchasing Managers’ Index (PMI) in the US, used to measure the economic health of the manufacturing sector, was slightly down from February (55.8) at 54.3 but has remained above 50 for the past two years, indicating growth. Furthermore, positive signs for short term growth, in the form of expanding new order volumes and falling unemployment, boosted business confidence towards growth prospects for the next twelve months.

In the Spring Statement delivered by the UK Chancellor in March, the Office for Budget Responsibility upgraded growth forecasts from 1.4% to 1.5% and lowered its forecast for borrowing from £49.9bn to £45.2bn. The Chancellor also announced that the UK is on track to meet its borrowing target of no more than 2% of national income by 2020-2021. Furthermore, UK inflation fell by more than expected in February to 2.7%, below the initial Bank of England forecast of 2.9%, and UK unemployment remained unchanged at 4.3%.

The UK and the EU have formally agreed on a 21-month Brexit transition period in which trading relationships will remain unchanged until the end of 2020. News of the agreement, combined with the ongoing speculation that the Bank of England will increase interest rates in early May, saw Sterling reach its strongest level since the start of February. However, evidence of uncertainty remains as trading in short term Sterling futures, used to hedge against potential interest rate moves over the next three months, reached its highest level in a decade. The annual average rate of house price growth in London slowed to 1%, representing a sharp decline from 4.3% a year ago and the lowest level since August 2011. This stands in contrast to UK-wide average house price growth of 5.2% in the year to February 2018, up from 4% in the previous year. Furthermore, UK mortgage lending increased by 4.9% and re-mortgage approvals rose by 9% year-on-year in February, as home owners look to lock in a fixed rate before further interest rate rises through the year.

Business activity in the Eurozone grew at its slowest rate for over a year in March, with the Eurozone PMI declining from 57.1 in February to 55.3, signalling the second successive monthly easing in the rate of expansion. Employment growth across the Eurozone also decelerated towards a six-month low. By country, output growth slowed the most in Germany and France towards a seven- and eight-month low respectively.

According to IHS Market data, the Chinese business outlook is generally optimistic with an expectation of an increase in new order inflows over the next 12 months. Employment across China is expected to increase over the next 12 months and input inflation costs are expected to soften. In contrast, IHS Markit data for the Japanese business outlook showed evidence of weakening confidence among private sector companies. However, the survey results suggest that private companies expect the 2020 Tokyo Olympic Games, as well as new client wins and new product launches, will boost business activity in Japan in the coming twelve months.

Oil prices edged lower at the end of March, after experiencing gains in the third week of the month, on signs that producers would extend supply curbs into 2019. Brent crude fell 0.5% to $70.12 a barrel. Gold rose 0.4% to $1,353.38 an ounce, holding around a five-week high.

With the prevailing uncertainty in global markets, we continue to reiterate our view that investors should take a long-term view on their portfolio returns. We are not recommending any changes in asset allocation and continue to see attractive opportunities across global asset classes. The global economy is still expanding, and we continue to communicate to our clients the importance of holding a well-diversified portfolio to alleviate any potential market volatility during these times.

Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.