Investments & Market Update April 2018
We said in January that ‘….we would expect bouts of volatility in financial markets to be a feature this year……’ and this has certainly turned out to be the case over the first quarter. The combination of internal market factors (stretched valuations) and external concerns (interest rate rises and global trade wars) brought an inevitable conclusion to the positive trend we saw up to the January 2018. Funds on Harvest’s Recommended List of Investments fell by just over 2% on average (in euro terms) over the first three months of the year. Most equity markets fell by considerably more than that over the period.
The growth in protectionism, burgeoning regulation (most recently targeted at the internet giants) and higher interest rates are all adding up to an increasingly hostile environment for business generally and our strong expectation is for repeated bouts of volatility in financial markets over the remainder of the year. And, as we said previously, we cannot rule out a major correction although we are attaching a lowish probability to such an event for the moment.
There were very few exceptions amongst the world’s equity markets to the negative trend witnessed in Q1 2018. China had a marginally positive outturn in local currency terms but slipped into negative territory when converted to euros. The US, UK and Ireland all fell by around 6% over the quarter in euro terms while Europe was down by less than 4%. The trend towards euro strength seen in 2017 was much less pronounced over the past quarter and, while the euro gained further ground against the dollar, it weakened against both Sterling and the Yen. Performance data for the major markets in both local currency and Euro terms is shown below:
Q1 2018 Q1 2018 (in euro terms)
US -3.0%* -5.7%*
UK -7.2%* -5.8%*
Europe -3.7%* -3.7%*
Japan -5.3%* -2.5%*
Ireland -5.7%* -5.7%*
China +0.9%* -1.9%*
* Source: Financial Express Analytics
Looking out into the remainder of the year, we are maintaining our cautious, but not necessarily bearish, view on equities. In terms of new investment in equities, we continue to advise clients to take a phased approach and to lean towards funds with a focus on income. Weak phases in markets could present good buying opportunities. Longer term, we remain most positive on continental Europe and emerging markets.
As a partial solution to the conundrum of low returns on cash, Harvest launched its Cash Alternative Strategy in 2017. This strategy incorporated a range of very low volatility funds offering a return significantly better than cash without involving a high degree of risk. The point to stress is that these are ‘low volatility’ not ‘no volatility’ funds and they will not be completely impervious to market movements. The past three months have seen the first real test of the strategy in terms of how it might behave in volatile market conditions. So how did they do? Suffice to say we were more than happy with the out-turn in that the strategy fell by just over 1% in euro terms during the quarter compared with an average loss in world equity markets of almost 4%. We continue to hold the view that cash rich clients should be looking to switch at least part of their cash holdings in to a strategy such as this as a long term position.
The turn in the interest rate cycle is having its inevitable, and much forecasted, impact on bond markets. The switch in trend may well be slow by historic standards but it will be inexorable and we continue to see little value for retail investors in mainstream bond markets. However, exposure to some specialist areas of the bond and credit markets may well yield returns, emerging market bonds and mortgage backed securities being two potential examples.
Property remains one of our favoured asset classes and it is one to which all clients should have a long term exposure in their portfolios. Yields on commercial property are still attractive across most of the developed markets. We favour ungeared or lowly geared pooled investments, particularly those with a visible income stream. Irish residential property is a particular hotspot at the moment, and looks to remain so for at least a couple of years. Harvest plans to bring bespoke opportunities to our clients over the short term offering exposure to this sector.
The major currencies settled down over the first quarter compared to the volatility we saw in 2017. We would expect both Sterling and the US dollar to trade in relatively narrow ranges against the Euro over the coming months. Brexit will probably ensure that a sustained recovery in Sterling does not happen for quite some time yet.
Gold and Oil
Gold is up by 2.5%* since the start of the year in dollars but this gain is fully neutralised when converted to euros. Further uncertainty this year is likely to be good news for gold and we may even see a partial reversal in the recent dollar/euro trend over the remainder of 2018. We would reiterate our view that a small exposure to gold in your portfolio is worth considering. Oil markets have also been relatively flat over the first three months of the year and, barring a serious escalation of conflict in the Middle East, we see little prospect of a sustained recovery in the near future.
* Source: Financial Express Analytics
Inflation signals have reappeared in certain markets and sectors and are behind the recent pressure to raise interest rates in the US and to reduce QE in Europe. Commentators are at odds as to whether we are experiencing the thin end of a material inflationary wedge or whether this is a temporary blip with inflation receding again over the coming months. In our view, it is difficult to see inflation having any marked impact on markets for the remainder of 2018 at least.
As always, you should only consider the investment views contained in this newsletter 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.