Global equity markets finished April strongly, with the Eurozone now assuming a relatively benign outcome of a Macron victory to the French election. MSCI World rose 1.4% over the month and 7.2% year-to-date in dollar terms. The Eurozone was the best performing region up 2.04% enjoying both a strongly rising equity market and Euro; political pressures in the Netherlands, France and Germany have weighed on the eurozone so far in 2017 but stronger growth and falling unemployment are supporting real wages and consumer spending. Eurozone equity markets have gained 6.8% so far this year despite the uncertainty of Brexit negotiations. Rising inflation expectations, loose monetary conditions and markets priced for bad news all help us to prefer European equities at present. We believe European equities are under-estimating the strength of the eurozone economy and over-estimating the political risk.
The other clear winner over the month was Emerging Markets with the MSCI Emerging Index also up 2.04% in dollar terms. The weaker dollar environment (the Dollar Index -1.3% in April) complements the robust company, bank and country balance sheets that lead us to favour Asian markets. We think that emerging economies stand in good stead to withstand any shocks delivered from developed economies where the main uncertainties currently lie particularly while the reflation trade is allowed to run.
Japan was also a strong performer during April up 1.52%, but that was largely currency related as indicated by the weakness of Euro/Yen down 2.4% on the month. Japan is still struggling to make economic headway despite its massive quantitative easing programme but there are still many opportunities amongst Japanese equities and signs that inflation is picking up giving us hope that optimism will be realised.
The UK is feeling the pressure of BREXIT as inflation is beginning to affect spending plans and the realisation that a hard result seems more likely. The triggering of Article 50 has created clarity and as such allowed the pound, which had discounted the worse case scenario of the UK crashing out with no deal, to appreciate approximately 1% vs. EUR and 3.25% vs. USD.
GBP vs. USD Year-to-date
Source data: Bloomberg
This obviously had a detrimental effect on the long running overseas earnings trade and consequently the FTSE 100 fell -1.62% whereas the more domestically orientated All Share index only fell -0.69%. The forthcoming election on June 8 will mostly likely see a larger Conservative majority but the outlook will remain uncertain so the financial markets are now left to react to media feedback on the progress of negotiations and the reality of economic statistics.
The first 100 days of the Trump administration have been dominated by the failure of the attempt to reverse Obamacare and its effect on the ability of the government to successfully implement its other plans. There now exists a level of caution over the continuance of the reflation trade, although stocks are currently buoyed by the quarterly reporting season, they are priced for perfection so the uncertainty surrounding US policy will cause a negative reaction if there is a perceived threat to the boost to global growth that has already been accounted for by investors.
Our investment strategy committee, which consists of seasoned strategists and investment managers, meets regularly to review asset allocation, geographical spread, sector preferences and key global market drivers and our economist produces research and views on global economies which complement this process.
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