April 2018 – Market Commentary
Equity investors, who had seen a volatile start to the year, found some comfort in April, as markets rallied to some extent, after the falls they recorded in February and March. In the UK, shares were boosted by the diminished prospect of a base rate rise in May, following a weak GDP figure. At the end of the month there was further good news for investors as Sainsbury's, the number two grocer in the UK, announced a merger with Asda, the number three. European markets were mixed, but Greece was a highlight, as the prospect of an end to the EU bailout this summer appeared much more likely. Shares on the Athens Stock Exchange rose by 10%, whilst Greek Government debt traded closer to German Bunds, as investors warmed to the prospect of an end to eight years of austerity. In the US, strong economic fundamentals once again drove the US Treasury Ten-year bond yield up, this time reaching 3%, but a more sanguine market did not react as negatively as some market commentators feared. Meanwhile, the Bank of Japan appeared to abandon the expectation of reaching the target 2% for inflation next year, though the equity market continued to perform well. Emerging markets saw a wide dispersion of returns, ranging from India, which returned more than 6%, driven by strong corporate earnings, to Russia, which fell by more than 8% on US sanctions against oligarchs and their interests.
The key economic news in April was the much weaker than expected 1stquarter GDP growth rate, which came in at just +0.1% versus the previous quarter and +1.2% when compared to a year ago, both lower than expectations. There were some one-off factors (such as the weather) and it is possible that the number could be revised up in the coming months. However, there is no denying that this was a disappointing number, doubly so when one considers the better economic news that has been coming out of the USA and Europe. The chart below shows the annual change in UK GDP and helps to illustrate the slowing rate of growth in recent years.
The immediate impact of the weak GDP number was that the probability of a May UK interest rate rise fell back sharply. The recent strong wage growth data had seen markets pricing in a 0.25% increase in interest rates, but the Bank of England had already started talking down the possibility of a rate rise as the latest inflation data came in lower than expected.
The last few days of the month saw political and the company surprises. Amber Rudd resigned over inconsistencies in her statements over the Windrush affair. Her departure might prove significant in altering the delicate balance within the Cabinet particularly over the question of what form, if any, of customs union may be put in place after Brexit.
The big company news was the announcement of the proposed merger between Sainsbury's and Asda. The whole process could take over a year, but if the deal were to go ahead, the landscape of UK food retailing could be significantly altered. In the medium term it could also lead to further downward pressure on the UK inflation rate if the merged group cuts food prices. Sainsbury's shares were up nearly 30% over the month.
A broad recovery in global equities during April saw most European markets higher over the month, with Germany, France and Italy returning +4.3%, +6.8% and +7.0% respectively. Large cap stocks outperformed their smaller counterparts as the Stoxx 50 Index gained 5.2%, compared with a rise of just 4.1% in the MSCI Europe Small Cap Index. Greek equities made a particularly strong showing, returning +10.0%, as Eurozone finance ministers agreed that the EU bailout of Greece should end in August. The end of the bailout will leave the Greek government free to set its own economic policies, after eight years of austerity measures, and Greek shares continued to ride a wave of optimism on the outlook for the country’s economy. The euro weakened by 1.8% against the US dollar, which also helped European stocks to advance, but was steady against sterling.
German Chancellor, Angela Merkel and French President Emmanuel Macron both visited the US for talks with President Trump, aimed partly at gaining some assurances over his plans for steel and aluminium tariffs that would affect European producers. Whilst Mr Macron appeared to have a much more cordial relationship with the President than the German leader, there was no clear sign that there will be any change of policy on the tariffs, which are due to come into effect on 1stMay, though the President has yet to make his final ruling on exemptions, and has until 12thMay to do so. The EU, along with Canada and Mexico are currently temporarily exempted. The tariffs, if they do apply to the EU, will ultimately have limited effect on German producers, which export just 5% of their steel to the US, with the overwhelming majority of exports going to other EU nations.
French rail strikes, were joined by a strike at Air France, where pilots and cabin crew commenced industrial action over a pay dispute. Air France shares fell by more than 10% during the month, as the company was forced to cancel around one third of its services at a cost of €250m, with flights grounded in both France and Germany. It is unclear how long the current unrest will continue, or how it may spread which may create a headwind for businesses across the EU.
As in other markets, European bonds were mixed, with both government and corporate bonds giving a small negative total return overall. Longer dated bond issues managed to achieve a marginal positive return, despite rates edging slightly higher at the longer end, in anticipation of continued strong growth and resultant rate rises in the future. Greek sovereign bonds saw their spread over the German Bund contract on optimism over the country’s improving economic fundamentals and the proposed end of the EU bailout; the ten-year Greek bond moved from yielding 3.79% over the Bund in March, to just 3.28% over in April.
In terms of economic data, unemployment remained at a low level in France and Germany, and the headline figure across the EU continued to trend lower, moving from 8.6% to 8.5% in February, as employment data from some of the weaker economies continued to improve. Inflation returned to 1.3% in March, after a dip to 1.1% in February, whilst wage growth data has not yet been published for Q1 2018. Business confidence, measured by a survey of managers’ appraisals of order books, tapered off in April, reaching its lowest level since last August. Meanwhile, business confidence in Greece strengthened.
In the 1stquarter of 2018, the UK economy grew just 0.1% over the previous quarter, but in the United States that figure was +0.6% and close to +3.0% on an annual basis. That faster rate of growth is one of the factors behind the big move up in US bond yields. The 10-year US Treasury bond yield started the year at 2.40% and during April it breached the 3% level, before settling back to 2.95%. The US Federal Reserve has been making encouraging noises about the strength of the US economy. US interest rates are expected to rise further this year and next as the authorities continue their policy of moving interest rates back up to historically more normal levels. Compared to other advanced economies, the US is much further down this road.
With the Trump tax reforms now firmly in place, companies have visibility on their future tax liabilities and this is one of the factors driving a big pick up in Merger and Acquisition (M&A) activity. Global M&A deals announced so far this year is already ahead of the previous peak of 2007, after just 4 months. As a result of the new US tax laws, some of the biggest US companies are also starting the process of repatriating large amounts of cash previously held overseas and that is helping to finance some of the take-over activity that we are seeing.
Asia Pacific and Emerging Markets
Japanese equities moved higher in April, with the TOPIX returning 3.6% (in yen terms), ahead of other developed markets. Increases were led by more cyclical areas of the market with the major banks Sumitomo Mitsui, Mizuho Financial and Mitsubishi UFJ Financial rising as investor sentiment towards cyclicals improved following a sharp sell-off in February and March. Larger cap stocks outperformed smaller cap, likely driven by the Yen which weakened against sterling, the US dollar and the euro. Currency weakness occurred as woes for the Government mounted following the release of several polls highlighting an ongoing decline in Shinzo Abe’s approval rating amid the continuing fallout of a cronyism scandal. Investors may be mindful of the risks for Japanese Government policy given an upcoming leadership vote in September. In monetary policy news, the Bank of Japan (BoJ) retained its key policy settings in its late April meeting. Interestingly however, the BoJ lowered its inflation outlook for 2018, and removed any mention of reaching the 2% target around 2019. The shift potentially signals the BoJ pushing out its expectation of when the 2.0% target will be reached and a continuation of highly accommodative monetary policy.
Source: Morningstar, Japan Institute of Labour, Japan Statistics Bureau
Emerging market equities rose 1.2% during the month, as measured by the MSCI Emerging Markets Index, in a month that was marked by political risk and substantial dispersion in returns. Indian and Korean markets were the leaders with the NIFTY 50 rising 6.2% and the KOSPI 200 up 2.8%. Indian markets were buoyed by heavyweights Reliance Industries (+9.1%) and Tata Consultancy (+24.0%), which both rose prior to announcing positive earnings reports in the second half of the month. The KOSPI was driven by Samsung (+7.7%), which comprises over 20% of the index. Samsung rose in advance of announcing record operating income on the back of robust demand in its memory segment and strong sales of the Galaxy S9. Other market giants Tencent (-5.2%) and Taiwan Semiconductor (-7.7%) struggled. Tencent continued its downward slide triggered on 22 March after Naspers announced it would sell a 2.0% stake in the company, while Taiwan Semiconductor failed to meet analyst earnings expectations in its Q1 results released on 19 April. However, the greatest surprise for the month was reserved for investors in Russian equities with the MICEX down 8.1% on the business day following the introduction of new US sanctions. The sanctions were imposed against a number of Russian oligarchs, government officials and related companies. The sanctions include freezing of assets and prohibit US persons from having any dealings with the sanctioned parties. The implications were particularly acute for Rusal, the world’s second largest aluminium company, which halved following the sanctions announcement as many investors were forced to sell their shares and the company warned of the potential for a technical default. Interestingly, by the end of the month the impact of sanctions was most felt through the ruble which fell over 10%. Local currency investors in Russia had an easier ride, as the MICEX quickly recovered from its loss to end the month up around 1.0%.
MICEX In RUBLE Terms
This article does not constitute advice. Anyone considering any form of financial planning should seek independent financial advice. First Wealth LLP is an appointed representative of Best Practice which is authorised and regulated by the Financial Conduct Authority (FCA). You should note that the FCA does not regulate tax advice.
Past performance is not indicative of future results. The value of your investment may go down as well as up.
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