The Multi-Asset Process

April 2018 market review

April proved another mixed month for markets although most were at least moderately positive after a rocky spell, helping to make up 2018’s losses.

While trade war fears appear to be receding for now, as the US sends a large delegation including Treasury Secretary Steven Mnuchin to negotiate a tariff deal in China, other concerns have risen up to take their place.

Three main factors weighed on sentiment over the month, largely in the US, namely rising bond yields, growing fears we are reaching the peak of the current cycle, and ongoing earnings concerns in the technology space.

US 10-year bond yields climbed above 3% for the first time since 2014 late in the month, which looks more attractive relative to inflation at just over 2% and has led to concerns cautious investors may switch out of stocks. Meanwhile, fears that the US economy is peaking were reinforced by an earnings statement from construction company Caterpillar, which said the first quarter would be the high watermark for the year. 

Finally, there is a sense that US technology companies – largely the once-unstoppable FAANGs (Facebook, Apple, Amazon, Netflix and Google) – face a growing maelstrom of problems, from greater regulation on privacy, to lacklustre sales, to a perceived vendetta by the Trump administration towards firms such as Amazon. Trump has consistently been at odds with the firm over recent years and his attacks have picked up pace, accusing Amazon of paying too little in taxes, using the Postal Service as a “delivery boy,” and costing the US money.

The tech quintet were responsible for around a fifth of the S&P’s 21% return in 2017 and while Amazon enjoyed a stellar first quarter, some of the other names have struggled in recent weeks, leading to concerns about market leadership for the rest of 2018.

There is no doubt these business models will hit trouble from time to time as they grow larger and we believe it is more likely investors will turn to unloved stocks, which may stall the momentum of the FAANGs. As we have said over recent months, we see an opportunity in value stocks after several years of them lagging growth names and have tilted our portfolios in that direction.

In the UK meanwhile, Mark Carney surprised markets with comments suggesting a widely expected interest rate hike in May is not a done deal. Having voted against upping rates in March and warning of ‘faster and sooner’ rises back in February, many assumed a 0.25% increase was all but nailed on for the Monetary Policy Committee’s May meeting. But the Bank of England Governor highlighted “mixed data” in the UK and said he is focusing on the general path of rate rises rather than precise timing, allowing policymakers to keep the economy on a stable path in the face of upcoming Brexit decisions.

Following the announcement of a sharp fall in the UK’s economic growth in Q1, with GDP rising just 0.1%, market expectations of a hike next month dropped to 20%. While the UK was once leading the G7 in terms of the interest rate cycle, this shows we are very much at the back of the queue now as the country continues to labour under the Brexit shadow.

This latest GDP reading was the weakest since the last three months of 2012 and has economists concerned the country stands of the brink of stagnation. We have seen a slowdown in UK inflation as sterling’s devaluation works its way through the system and this weaker growth is clearly a concern, although GDP disappointments often come earlier in the year due to weather issues.

Brexit obviously continues to rumble on and while the transition period has finally been negotiated, the quicker the terms are finalised the better. If we get more clarity by September/October time, that would be good news for markets and we continue to believe a harder Brexit is priced in than we will eventually see.

Globally speaking, we are in an environment of higher growth, higher inflation and higher bond yields and against that backdrop, we are overweight high-yield bonds and also have some exposure to emerging market debt.

Within our high-yield position, around 30% of the exposure is short duration, which means we are shorter than the benchmark. The balance to get right however is that the shorter you go, the higher your correlation to equities and we are keen not to negate bonds’ diversifying properties.

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Wednesday, May 9, 2018, 9:50 AM