Published: April 4, 2019

Relevant Strategies

• Moderate
• Balanced (and International Balanced)
• Growth
• Aggressive Growth (and International Growth)
• Gold & Precious Metals
• Natural Resources

Our Commentary

Equities

Despite weakening projections for global GDP growth and earnings, equity markets performed strongly in the first quarter of 2019.

Some of the best performance was seen in the US, particularly in technology shares which bounced back after a difficult end to 2018. The improvement in confidence was largely down to two key factors. Firstly, investors grew more hopeful that the US and China would be able to resolve their trade dispute amicably. Secondly, the US Federal Reserve scaled back its outlook for interest rate increases. The previous forecast of two interest rate increases this year was cut to zero with one now seen in 2020.

The UK equity market performed well and the FTSE 250, with a bias toward the domestic economy, gained 9.8%. Sterling strengthened against the other major currencies as investors reassessed their downbeat forecasts in respect of Brexit.

The diversified S&P 500 in the US made a total return of 13.7% in USD terms, MSCI Europe gave a Euro total return of 12.7% and FTSE Emerging Markets added 10.4%.

In the emerging markets, growth and value factors outperformed defensive sectors and the infrastructure exposure lagged. In Asia, Japan was the most disappointing market as the economy was hit by trade tensions with China. The Nikkei 225 made a gain of 6.9%.

Bonds

Bond markets also produced good returns for investors, gaining across the board in response to the Federal Reserve’s latest forecasts.

Corporate bonds gained 3.9% with strategic bonds up 3.7%. Despite little evidence of inflationary pressures, index linked gilts made a total return of 6.1% while the high-yield sector rose by 5.1%.

Commodities

Gold was broadly unchanged. Falling bond yields tend to enhance the attraction of gold, which yields nothing, as an alternative asset. The dull performance reflects the fact that investors were more confident in risky assets such as equities and saw little reason to chase gold at current levels. The absolute return sector gained 1.5%, helped by improving returns in bonds and equities.

The energy sector rebounded as the oil price made strong gains.

Portfolio Actions

The reversal in both equity and bond prices after the Q4 drop, led by positive performance from US tech, resulted in strong performance for the portfolio exposure to momentum factor strategies while the scramble for yield in an environment of extended low interest rates generated double digit returns for both the global property exposure and the UK REIT exposure.

We added exposure to REITs, operating in the booming industrial/logistics, sub-sector and trading on a large discount to NAV.

We are considering exposure to an airline company with heavily depressed profits but still benefiting from a valuable expansion into resorts and cruises. Valuation indicators indicate 29% upside.

Any positive resolution of Brexit and the trade war between the US and China would clearly be well received by the markets as they would likely result in an increase in economic activity in the short run. However, given the late stage in the economic cycle and the fact that equities have already come a long way in a short period of time, a certain amount of caution is warranted.

Diversification across a broad range of asset classes and regions remains a sensible approach for the long run.

Regards,

Euro Pacific Advisors Management Team