Investment Comment April 2017

Markets were mixed in March, with many indices exhibiting volatility after a strong start to the year. The US was weak, with the S&P 500 (-1.39%) and Dow Jones Industrial Average (-2.14%) both down in USD terms as the ‘Trump trade’ partially reversed. In the UK, the Top UK 100 Companies (-0.81%) underperformed the UK All Companies (+0.93%) as investors favoured mid-cap over large-cap stocks. No major market ended Q1 at a lower level than it started the quarter, with Emerging Market and Asia Pacific ex-Japan equities performing most strongly.

In the UK, the Chancellor’s Spring Budget and the triggering of Article 50 dominated headlines in March. The OBR upgraded short-term growth forecasts, continuing the run of strong fundamental data seen in recent months. The Bank of England voted to hold interest rates at 0.25% despite inflation rising to a 3-year high. Growth in the Consumer Price Index (CPI) of 2.3% was driven by increases in the cost of food and fuel, raising concerns amongst commentators about the future of consumer spending. Consumer borrowing continued to grow steadily in February, with consumer credit increasing by £1.4bn – an annual growth rate of 10.5%. A weakening consumer goods sector softened the expansion of UK manufacturing, with growth slowing compared to recent months but continuing to expand overall.

The US economy remains fundamentally strong, albeit slightly further ahead in the economic cycle than the UK. The Federal Reserve (‘the Fed’) raised interest rates for the third time since the crisis, with the target range for the federal funds rate now 0.75% to 1%. Members of the Fed had signaled the move, which was therefore widely anticipated by markets. Expectations are for two or three further rate rises in 2017, as inflation continues to pressure targets and growth remains strong. The personal consumption expenditures index (PCE) hit 2.1% in February, up from 2% in January. US consumer confidence climbed to its highest level in over 16 years in March, as consumers expressed a more upbeat view of the short-term outlook for business, jobs and personal income. However, US retail sales rose by just 0.1% in February month-on-month.

In the Netherlands, Prime Minister Mark Rutte’s centre-right Liberal (VDD) party secured a general election victory over the far-right populist challenger Geert Wilders. The result eased concerns around potential populist outcomes in Europe this year which have the potential to de-stabilise markets. The first round of voting in the French elections will take place on the 23 April. German elections for the allocation of seats in Parliament (Bundestag) are scheduled for the 24 September. Current polls indicate that Angela Merkel’s Christian Democratic Union (CDU) party are slightly ahead in a closely contested race with the Social Democratic Party (SPD).

In China, bullish sentiment has returned as investors become more comfortable with the prospects for the Chinese economy. February saw net inflows of capital for the first time in three years, according to the International Institute of Finance. China is leading wider Emerging Market (EM) inflows, as fears have receded that a Donald Trump Presidency will damage global trade volumes. EM assets have all responded positively, with equities showing strong gains, currencies rebounding, and bond issuance hitting an all-time record this quarter.

We remain cautious on the outlook for UK Commercial (and Residential) property with potential interest rate rises in the offing and government policies and tax changes taking effect. We prefer the inflation-protected status of Infrastructure investments.

As investors have started to take profits on strong performers and markets continue to run at record highs, we are receiving frequent queries about whether now is a good time to enter or exit the market. We continue to reiterate our view that investors – particularly in equity markets – should take a 5-year view on returns. We do not appear near the end of this unconventional economic cycle, and are not recommending any radical changes in asset allocation. We continue to see attractive opportunities across asset classes, and advise clients against attempting to ‘time’ the market.

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.