Investment Comment May 2017

Markets continued to be mixed in April. In the US, they regained some ground after a weaker month in March. The S&P 500 (+0.99%), Dow Jones Industrial Average (+1.45%) and Nasdaq (+2.76%) all performed strongly in USD terms. European markets also rallied as political risk appeared to ease. The French CAC40 (+3.15%) and Greek AT Index (+8.40%) were the standout performers as investors gained comfort on EU stability from the results of the French primary elections. In the UK, mid-cap once again out-performed large-cap, with the Top UK 100 Companies (-1.33%) underperforming the UK All Companies (-0.37%). April also saw recent currency trends starting to reverse. Sterling strengthened against the US Dollar (+3.20%), the Euro (+0.84%) and the Yen (+3.31%) despite UK rate rises continuing to look relatively distant.

In the UK, fundamental measures continued to point to strength overall, but with indications of potential further weakness in the consumer sector going forward. UK manufacturing expanded at its fastest rate for three years during April, with the IHS Markit purchasing managers’ index rebounding to 57.3, up from a four-month low of 54.2 in March (with any reading over 50 indicating expansion). The Office of National Statistics (ONS) gave a preliminary estimate for GDP growth of 0.3% in Q1, down from 0.7% in Q4 as economists pointed to slowing consumer demand.

UK house prices registered their first quarterly decline in over four years in the three months to April, falling 0.2% quarter-on-quarter. Residential mortgage approvals fell 2.8% between February and March according to the British Bankers’ Association (BBA). Unsecured borrowing continued to grow, up 6.1%, compared with 6.5% in February. UK retail sales fell further than anticipated in March, with data from the ONS showing the first quarterly decline since 2013.

In the US, job growth increased in April, with the economy adding 211,000 jobs and the jobless rate falling to its lowest level since 2007. The data supported the Federal Reserve’s assertion that the slowdown in job activity in Q1 was ‘transitory’. The odds of a rate rise in June implied by federal funds futures contracts rose to almost 100% following the release, according to Bloomberg data.

In Europe, political uncertainty continued to abate as the French population elected centre-left candidate Emmanuel Macron as their new President. The result was less contested than some commentators had speculated, with Macron securing 66% of the vote.

In Japan, the yield on 10-year government bonds fell below zero for the first time since mid-November as investors returned to safe-haven assets. Growing concern over geopolitical tensions relating to North Korea, as well as skepticism about the Trump administration’s ability to follow through on campaign promises led to a move towards ‘risk-off’, which started to reverse at the end of the month.

The unconventional cycle continues, with the US further advanced in the tightening process than the UK and Europe. We continue to see opportunities in equity markets – and other asset classes – globally. We recommend that clients maintain well-diversified portfolios to reduce the impact of volatility, but remain positive on the prospects for attractive returns in the future.

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.