Equity markets rebounded in April following a challenging first quarter. Whilst the concerns that triggered the sell off at the start of the year remain; such as slowing economic growth, increased inflationary risks and growing global trade tensions, the mood surrounding the equity market lightened significantly.
The UK equity market led the way over the month. Whilst it is difficult to assign a simple narrative to these short-term fluctuations, it seems the market reacted positively to the more dovish outlook for monetary policy. At the start of April, the market had assigned as a near certainty that the Bank of England would raise rates at their next meeting, however following some disappointing data and dovish comments from governor Mark Carney, this probability dissipated to only about a 20% chance. To enhance this, and perhaps of greater importance, was simply how downtrodden the UK market had become. Surveys had indicated that investor positioning was extremely negative towards UK equities, meaning it took very little iteratively better news to see a sharp reversal in the fortunes of the market.
Whilst the UK led, all major global equity markets produced positive returns over the month. The global economy remains in good shape, and whilst indications are that growth momentum is likely to have peaked towards the end of 2017, global PMI data almost universally implies a continued expansion in activity. This environment has supported corporate profitability as highlighted by the particularly strong US earnings season over the month. Whilst the 80/20 ratio of “beats” to “misses” is something we have become accustomed to, the difference this season was that expectations were not slashed in advance to manufacture the result. In fact, we saw modest upgrades in advance of the results, largely due to the positive impact of the tax reforms, which companies still managed to exceed at the normal 80/20 rate.
The expansion of the Japanese equity market came despite a return of political risk to the country. Japan had endured six different prime ministers in a five year period prior Shinzo Abe’s election victory in 2012, however this period of relative calm has been interrupted in recent months by a number of cronyism scandals that have dented Abe’s popularity. This has raised the real possibility that he could be defeated at the upcoming LDP leadership election in September. The markets accommodating reaction to this is perhaps a reflection that the policies underpinning Abenomics look protected, as his party, the LDP, still enjoy a large lead in the polls.
Finally, the progress of various geopolitical tensions was mixed over the month. There was a pause to the Sino/American trade spat that had soured investor sentiment at the start of the year, as the consultation period on the proposed tariffs proceeded. There was a historic meeting between the leaders of North and South Korea in the demilitarised zone, which greatly reduces stress in the region. However, in contrast relations between the US and Iran escalated as the US prepared to remove itself from their nuclear deal.
The return of volatility that has characterised the start of 2018 was to be expected, as investors weighed up the robust economic and corporate environment with the worsening liquidity conditions. We are therefore positioned cautiously, with a small preference for equities over bonds, monitoring the evolution of the cycle closely.
Michael Paul CFA
Fund Research Analyst
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