February started where January left off – providing investors with a timely reminder that global markets fall quicker than they rise. Strong US employment numbers and evidence of wage growth fuelled investor concerns over inflation and the prospect of a more aggressive US interest rate cycle. This led to a sharp sell-off in equity markets in the first half of the month, with all global stockmarkets being sold off indiscriminately.
The spike in volatility was pronounced. After surging to a high of 50.3 at the beginning of the month (the VIX’s highest reading since mid-2015), the “fear index” ended the month below its historic trend level of 20, as investor risk aversion came and went. This was reflected in risk assets which following some of the heaviest falls for the past two years early in the month recovered much of the ground from mid-month onwards. However, volatility may have come and gone for the meantime but the cause of investor concerns remains unresolved and it is reasonable to expect that 2018 is not going to be a repeat of the smooth rising markets witnessed last year.
As inflationary concerns became more heightened and investors focused on the threat of more aggressive US interest rate hikes, bond markets suffered a sell-off in tandem with equities early in February. The yield of 10-year US Treasury bonds nearly hit 3% – the highest level since 2014 – and the sell-off resonated across global bond markets. Despite UK gilts losing around 2% at the beginning of the month, they recovered the lost ground later in the month to finish flat.
Currency continues to influence market returns and, as we have mentioned, has become a key focus for us when assessing global markets. Whilst sterling strength in January hampered UK investor returns, it was the opposite in February. Sterling weakness versus other major currencies, particularly the dollar and the yen, saw local currency losses significantly pared back in these stockmarkets for UK investors.
Indeed, in the case of Japan, sterling weakness against the yen is likely to have translated into some possible gains for UK investors over the month. Movement between the pound and the euro was less significant, with sterling weakness translating into around 1% uplift for UK investors over the month.
Looking ahead, US interest rates (and Central Bank policy overall) and currency movements are going to be key in dictating investor returns as we move through 2018. Furthermore, this week President Trump threw another curveball into the situation with his recent announcement regarding imposing tariffs. Such ‘protectionism’ could impact global trade if implemented. In the meantime, it further weighs on investment sentiment and could prove another catalyst for more market jitters.
We cannot predict which way markets will turn in the coming weeks, but our top down view remains focused on the belief that there is value to be had in equities versus cash and bonds, with a number of areas offering long-term growth prospects and attractive dividends. Whilst a well-diversified portfolio can continue to provide cash beating opportunities in a number of areas for those prepared to ignore short-term noise, focus on valuations and take a longer-term perspective.
The above article was first published by Whitechurch Securities, March 2018