The Multi-Asset Process

May 2017 market review

Mounting election fever in the UK dominated proceedings in May, intercut by tragic scenes in Manchester.

After the events of 2016, anyone willing to make political predictions is brave indeed: while consensus still points to a Conservative victory, Labour looks to have made some inroads and there are whispers of a hung parliament once again.

UK GDP growth was revised down to 0.2% during May, compared to 0.3% in April, which clearly represents a soft patch. The ONS said this was mainly due to consumer-facing industries such as retail and accommodation falling off and household spending slowing. With the election imminent, there is little agreement among economists about what this means: some have suggested post-Brexit sterling weakness is finally beginning to take its toll but others have dismissed claims the lower figure in May is the start of a sustained slowdown.

Whatever June 8 gives us, it remains the case that political volatility is not translating into market volatility and the FTSE 100 breached all-time highs above 7500 twice during the month. While there have been concerns voiced about the durability of Trumpflation, many commentators are also asking whether we could potentially see the index exceed the 8000 level over the coming months.

On the interest rate front, the UK’s Monetary Policy Committee (MPC) left policy unchanged at its May meeting and shows little sign of any tightening with so much Brexit uncertainty ahead. Elsewhere, the European Central Bank (ECB) also kept rates on hold at its meeting at the end of April and also shows no desire for near-term tightening despite indications the eurozone economy is growing steadily. We saw a Macron election victory in France during the month and, alongside improving data, that outcome looks to have settled investors for now.

There remains a gulf between North and South Europe but a large part of the rise in populism has come from people craving higher living standards and an improving economy can obviously provide that to some extent.

As for the US, noises from the Federal Reserve suggest the bank may be set to tighten further – and we could see a hike as early as June and at least one more during the rest of 2017.

Despite a Republican-led senate and House of Representatives, Donald Trump – like Obama before him – is finding out how hard it is to enact policies. Whatever Trump does achieve is likely to be pro-businesses however and we see encouraging signs in areas such as deregulation and infrastructure spending.

Fed policy minutes released in May talked about the massive task of unwinding a $4.5 trillion balance sheet, with this process expected to begin over the coming months. Given the unprecedented nature of this exit, policymakers are keen to emphasise unwinding will be “gradual and predictable” but it will be interesting to see what this means for US equities in the months and years ahead.

Finishing off our tour around the world, China took a hit as Moody’s downgraded the country for the first time since 1989. This is hardly unexpected however as credit growth has routinely outstripped nominal GDP growth for several years, and again, we can only watch with interest as the country looks to deal with its leverage issues.

Looking around markets, first-quarter earnings season is coming to a close and figures have been encouraging. Commentators have long been saying equities cannot maintain their upward trajectory without support from earnings and estimates have improved this year.

So far for Q1, figures from Citigroup show close to 80% of US companies have reported positive earnings surprises, and 64% have revealed better sales than expected. In Europe the figures were 65% for earnings surprises and 53% for sales.

As we said last month, we are keen to add to areas such as Europe, Asia and Emerging Markets but not at current inflated prices and staying out of these markets has perhaps been detrimental as they have continued to rise. That said, we have plenty invested and are happy to keep our limited amount of cash until we see more attractively priced opportunities.


• Past performance is not a guide to future performance. • Do remember that the value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. • Any performance shown represents model portfolios which are periodically restructured and/or rebalanced. • Actual returns may vary from the model returns. • There is no certainty the investment objectives of the portfolio will actually be achieved and no warranty or representation is given to this effect. • The portfolio therefore should be considered as a medium to long-term investment.

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Wednesday, June 7, 2017, 2:24 PM