Market Update April 2017
The bullish start to the year has clearly slowed in recent weeks and a marked tone of uncertainty is a growing influence on market direction currently. Bond markets have fluctuated somewhat over the first quarter as interest rate expectations have waxed and waned but were flat for the quarter as a whole. The strong early part of the quarter allowed the funds on our Recommended List to rise by almost 5% (in euro terms) on average over the three months.
The major factors weighing on markets are unchanged from three months ago – Brexit, the political landscape in Europe, political change in China and the outlook for growth in the US are all likely to be significant influences on how equity markets perform this year. We continue to hold the view that 2017 will most likely be a volatile year – the risk of a substantial correction in equity markets, while still less than 50% in our view, has not abated.
Although faltering a little at the end of the period, the first three months of the year were positive for equities and equity markets across the world benefited from the positive sentiment generally. Japan, which finished the quarter unchanged, was the sole exception among developed country markets. Emerging markets in contrast, rose strongly in line with investor confidence and on average grew by strong double digits (growth prospects in the Far East and economic recovery in Latin America). Currencies were less of an issue than had been the case in 2016 – in Euro terms, the dollar and Sterling moved only marginally. Performance data for the major markets is shown below:
Q1 2017 Full Year 2016
US +6.3%* +11.2%*
UK +4.3%* +19.1%*
Europe +6.4%* +3.1%*
Japan -0.4%* +0.4%*
Ireland +2.0%* -4.1%*
China +10.2%* +2.8%*
* 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.
The decision by the US Federal Reserve to commence a phase of interest rate increases in 2016 was a clear signal that the bond markets were finally turning. However, on the evidence so far, nothing dramatic would appear to be on the cards for quite some time yet and we do not expect to see a whole lot in terms of interest changes in 2017. But economic news on both sides of the Atlantic has grown more positive of late and if there is evidence of emerging inflation, the interest rate cycle could accelerate upwards in 2018. On the other side of the coin, however, we have the prospect of Trump inspired trade wars, political unrest in Europe and Brexit, any or all of which could have a marked dampening effect on global economies.
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.
We held a recent client seminar on opportunities in the property market and judging by the level of interest in the event and in the lively discussion which followed the formal presentations, property as an investment opportunity is as attractive as it has ever been for Irish pension funds and private investors. As a house, we remain fans of property on a 3-5 year view and 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 looking 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.
After a volatile second half of 2016, currency markets were much more stable in the first three months of 2017. Forecasters still expect a strengthening dollar for the remainder of this year and a relatively weak euro. Sterling could be the most volatile of the major currencies, buffeted by economic news and progress with Brexit negotiations.
Gold and Oil
Having risen by 9%* in dollar terms during 2016, the uncertainty in the markets continued to provide strong support for gold, which rose by a further 8% in the first quarter, again in dollar terms. We would reiterate our view that a small exposure to gold in your portfolio is worth considering. Optimism about the OPEC agreement in November waned over recent months and the oil price has fallen by around 7% since the start of the year to its current level of $53 per barrel. Given the current global supply demand picture, we do not expect any change in the recent pattern over the coming months.
* Source: Financial Express Analytics
As mentioned, inflation is unlikely to be a factor in markets during the current year but could well emerge as a significant topic in 2018.
As always, you should only consider the investment views contained in this update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you have any queries in relation to your investment portfolio, please contact us on 01 2375500.