Market Update July 2017

Market Update July 2017

The first half of the year has been generally positive in financial markets despite a host of reasons for uncertainty around the globe.  However the tone has had a clear negative shift in recent weeks which could signal a summer of volatility ahead. The deterioration in tone was particularly notable in bond markets as investors accept that the long period of monetary policy around the world is finally ending.  The generally benign backdrop over the first half of the year allowed the funds on our Recommended List to rise by more than 5% (in euro terms) on average over the six months.

The major factors weighing on markets currently include the expectation that the world’s central banks are looking likely to raise interest rates over the medium term, the uncertainty around the delivery of Trump’s agenda in the US and the outlook for the Chinese economy. More locally, Brexit continues to dominate. We continue to hold the view that a period of volatility is in prospect – the risk of a substantial correction in equity markets, while still less than 50% in our view, has not abated.

Equities

Having had a strong first quarter, equities fared much less well in the second quarter. China was the standout market over the period and is ahead more than 20% year to date. The ongoing improvements evident across European economies were reflected in healthy performances in the region’s  equity markets. Europe grew by almost 10% over the first half of the year. Japan, in contrast to other markets, had a much stronger second quarter as investors became more convinced about the structural changes being implemented, particularly affecting Japanese corporate culture. Currencies were also more volatile in the second quarter. Euro based investors suffered from both a fall in Sterling and a weakening dollar. Performance data for the major markets is shown below:

.                     Q2 2017                        H1 2017
US                  +2.7%*                         +9.0%*
UK                  +0.4%*                        +4.7%*
Europe           +2.9%*                        +9.9%*
Japan             +5.1%*                         +4.8%*
Ireland           +3.2%*                         -4.8%*
China              +7.6%*                         +20.1%*

* Source: Financial Express Analytics

As markets continue to rise, we cannot discount the risk of a market correction. However, there seems little doubt that the economic backdrop is generally on an upward tack so that any correction could bounce back relatively quickly and could well represent a good buying opportunity. So while we are advocating caution in relation to increases in equity exposures, we are not advising clients to reduce unless their exposures to equities are excessive. We prefer equity funds with a focus on income as they are likely to be less volatile should markets get bumpy. Longer term, we are also very positive on emerging markets and believe most investors should discuss having at least some small exposure to those regions with their advisor. Our longer term view on equities generally remains very positive.

Cash

All investors are aware of the poor to no return from cash deposits, a situation which is unlikely to change for quite a long time to come. We recently launched the Cash Alternative Strategy, which incorporates a range of very low volatility funds which offer a return significantly better than cash without involving a high degree of risk. We are strongly of the view that cash rich clients should be looking to switch at least part of their cash holdings into such a strategy.

Bonds

As mentioned, bond markets moved sharply into negative territory which could be the start of a downward trend which could continue for some time. Overall we are sticking to the view we have held for some time now that the mainstream bond market offers little value for investors currently. We do however continue to see some value in particular niches such as Emerging Market bonds and some of the specialist credit markets.

Property

Our view on this asset class is undimmed and we remain fans of property on a 3-5 year view. We see it as a core asset in most portfolios.  Income can be a great compensation in volatile times and property is still one of the best sources of reliable income available. Investors need to be cautious about geared investments, as the next couple of years could see banks coming under balance sheet pressure and look to force asset disposals in some cases.  The domestic market still looks to offer good value but the same underlying value arguments apply to many international property markets also. Problems around liquidity and diversification must always be taken into account when investing in property but need not be a serious concern for longer term investors. In addition there is now a wide range of stock market listed real estate investment trusts offering exposure to diversified real estate assets combined with good liquidity.

Currencies

Against the trend signalled by forecasters at the start of the year, the dollar has been the weakest of the major currencies over recent months. It is expected to settle at these levels although Trump related developments are more likely to lead to further weakness should they come about. Until Brexit matters become clearer Sterling is also likely to be a volatile currency.

Gold and Oil

Gold has risen by 8%* in dollar terms since the start of the year and continued market uncertainty may provide further support for gold over the coming months. Dollar weakness has, and may continue to eat up most of these gains for euro based investors. We would reiterate our view that a small exposure to gold in your portfolio is worth considering.  Oil markets continue to be hugely unpredictable as evidenced by the recent sharp fall in the price. A barrel of oil is trading at $48 currently compared with $57 at the start of the year. We see no prospect of a sustained recovery in this commodity.
* Source: Financial Express Analytics

Inflation

Inflation is unlikely to be a factor in markets during the current year but could well emerge as a significant topic in 2018.

Contact Us

As always, you should only consider the investment views contained in this market update article in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact your Harvest Financial Services Client Manager.
Terry Devitt
Investment Director

July 2017

Warning: Past performance is not a reliable guide to future performance.
This material is not intended to provide advice and is provided for general information purposes only.