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Market update

1/6/2018

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Equity investors, who had experienced a volatile start to the year (as highlighted in the previous blog) found some comfort in April and May as markets rallied to some extent, after the falls they recorded in February and March.
 
UK
In the UK, shares were boosted by the diminished prospect of a base rate rise in May, following a weak GDP figure of just. At the end of the month there was further good news for investors as Sainsbury, the number two grocer in the UK, announced a merger with Asda, the number three.
 
There were potentially some one-off factors that resulted in the weak Gross Domestic Product growth rate (such as the weather) and it is possible that the number could be revised up in the coming months. However, there is no denying that this was a disappointing number, doubly so when one considers the better economic news that has been coming out of the USA and Europe.  
 
Europe
European markets were mixed, with an overall improvement but Greece was a highlight, as the prospect of an end to the EU bailout this summer appeared much more likely. Shares on the Athens Stock Exchange rose by 10%, whilst Greek Government debt traded closer to German Bunds, as investors warmed to the prospect of an end to eight years of austerity.
 
In terms of economic data, unemployment remained at a low level in France and Germany, and the headline figure across the EU continued to trend lower, as employment data from some of the weaker economies continued to improve. Business confidence, measured by a survey of managers’ appraisals of order books, tapered off in April, reaching its lowest level since last August. Meanwhile, business confidence in Greece strengthened.
 
US
In the US, strong economic fundamentals once again drove the US Treasury Ten-year bond yield up, this time reaching 3%, but a more sanguine market did not react as negatively as some market commentators feared.
 
With the Trump tax reforms now firmly in place, companies have visibility on their future tax liabilities and this is one of the factors driving a big pick up in Merger and Acquisition (M&A) activity. Global M&A deals announced so far this year is already ahead of the previous peak of 2007, after just 4 months. As a result of the new US tax laws, some of the biggest US companies are also starting the process of repatriating large amounts of cash previously held overseas and that is helping to finance some of the take-over activity that we are seeing.
 
Japan
Japanese equities moved higher, ahead of other developed markets. Increases were led by more cyclical areas of the market with the major banks Sumitomo Mitsui, Mizuho Financial and Mitsubishi UFJ Financial rising as investor sentiment improved following a sharp sell-off in February and March. Larger cap stocks outperformed smaller cap, likely driven by the yen which weakened against sterling, the US dollar and the euro.
 
Meanwhile, the Bank of Japan appeared to abandon the expectation of reaching the target 2% for inflation next year, though the equity market continued to perform well.
 
Emerging markets
Emerging markets saw a wide dispersion of returns, ranging from India, which returned more than 6%, driven by strong corporate earnings, to Russia, which fell by more than 8% on US sanctions against oligarchs and their interests.
 
The sanctions included freezing of assets and prohibit US persons from having any dealings with the sanctioned parties. The implications were particularly acute for Rusal, the world’s second largest aluminium company, which halved following the sanctions announcement as many investors were forced to sell their shares and the company warned of the potential for a technical default. Interestingly, by the end of the month the impact of sanctions was most felt through the ruble which fell over 10%.
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    Director, David Hardman has over 20 years experience in financial services.

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