Headline asset class statistics for April 2018 (GBP returns):
Equities: FTSE 100 +6.8%, S&P 500 +2.2%, MSCI World +3.1%, MSCI Emerging Markets +1.5%,
Bonds: FTSE All Gilts Index: -1.0%
Currencies: GBP/USD -1.8%, GBP/EUR +0.2%,
Commodities: Gold +1.2%, Bloomberg Commodity Index +4.5%
Rising bond yields, trade wars, tech privacy concerns, falling share prices; the first quarter of 2018 was a tough one for investors. Markets were buffeted by a series of bad news stories that combined with a reversal in buoyant investor sentiment to puncture equity prices.
While those paper losses hurt at the time, in the context of market history they were actually relatively insignificant moves — speed bumps in the road — and equity markets rallied in April to bring major indices to within a percent or two of their start-of-year levels.
Pinpointing the cause of the rally is difficult, but US corporate earnings have been robust, with the leading tech names in particular posting strong updates. Economic data across the globe continues to be in expansionary territory, although the one fly in the ointment has been the UK, with manufacturing data weaker than expected, soft retail sales and finally first quarter gross domestic product (GDP) estimates of 0.1% coming in below forecast. This may be related to the cold weather, but regardless, it has pushed out the market’s expectations of an interest rate rise by the Bank of England (BoE), leading to a retracement in the value of the pound after strong gains earlier in the year.
Paradoxically, the FTSE 100 is a major beneficiary of this weakness, with more than 70% of earnings coming from overseas leading to rising profitability expectations. The index enjoyed a sharp end of month rally and a total return of 6.8%, the strongest gain since December 2010.
Fixed income (which has a larger weight in the more cautious Smart Portfolio allocations) has seen much less volatility. Rising yields in the US (the US 10—year government bond hit 3%) put a little bit of downwards pressure on returns, while conversely yields slightly fell in the UK which enabled corporate bonds to make small gains. Overall, year to date returns are very similar to equities; flat to slightly down.
As things stand at the end of April, there’s not much to choose between the major indices; the FTSE 100 is down 0.9%, the S&P 500 is down 2.1%, and the MSCI Emerging Market Index has fallen by 0.8%. Nevertheless owning a diversified portfolio — such as IG Smart Portfolios — has arguably never been more important.
Investors often forget that 24% of the FTSE 100 is in just three companies: Shell (11%), HSBC (7.5%) and BP (5.4%). It needn’t take an investment professional to foresee what could go wrong there, both on an individual company level and should oil prices decline.
Similarly in the US, without Amazon, Microsoft, and Netflix the S&P 500 index would have fallen by 3.2% year to date instead of 2.1%. Those three stocks alone have added 1.07% to returns, and likewise, stock leadership over the past year has been concentrated in a few big names.
While market direction continues to be dictated by short—term news, long—term investors should aim to maintain their composure. Solid economic growth and central bank policies that keep a keen eye on inflation continue to be supportive of making gains in the medium term.