The economic slowdown seems most pronounced here in the UK, but this is likely to be a reflection of Brexit concerns.
- This proved a more volatile quarter for global equities, marked by a sharp fall in May and a subsequent rebound in June, leaving global equities up by just over 3%.
- Once again, trade tensions between the US and China surfaced but simmered down towards the end of the quarter.
- Markets also enjoyed support from central banks who are becoming increasingly accommodative.
- The UK equity market was, despite ongoing Brexit dramas and the resignation of the Prime Minister, able to rise.
- The US S&P 500 equity index registered a new record high as the Federal Reserve indicated US interest rates may be cut later in the year.
- Eurozone equities rose in April, fell sharply in May and rebounded in June to end the quarter in positive territory. Further monetary policy easing is in store should inflation stay low.
- The yen strengthened as a result of its safe-haven status so Japanese shares underperformed other developed markets.
- Government bonds performed well as central banks move towards cutting rates later in the year.
UK shares rose by over 2.5% during the quarter, despite the news that Theresa May resigned as Prime Minister and leader of the Conservative Party.
Meanwhile, the negative impact of an extension of the original Brexit deadline from 31 March to 31 October on the UK manufacturing sector became clearer. While Gross Domestic Product (GDP) grew by 0.5% in Q1, in line with expectations, the Office for National Statistics revealed that the economy shrank by 0.4% in April.
Eurozone equities rose over the quarter. The lack of any further escalation in the trade wars between China and the USA and the USA and Europe in June helped the market to recover after the fall in May.
Q1 GDP growth for the Eurozone was confirmed at 0.4% quarter-on-quarter. Annual inflation for June was stable at 1.2%. European Central Bank President Mario Draghi hinted that further monetary policy easing, such as new bond purchases, could be on the way if the Eurozone inflation outlook fails to improve.
US shares performed strongly, rising by over 4.5% over the period and the S&P 500 set a new record high. Uncertainty surrounding the US-China trade stance caused a pullback in May. However, investors enjoyed sustained dovishness from the Federal Reserve and indications of progress in trade discussions at quarter end.
US GDP grew 3.1% in the first quarter, much in line with expectations. Employment data remains a cause for optimism, notwithstanding a slight fall in June. The unemployment rate remains at a half century low of 3.6% and average hourly earnings climbed 3.1%, year on year. There were, however, signs of weakening consumer and business confidence, which the bond market took as an indication of future weakness in the US economy.
Japanese shares lagged other developed markets in the three months to June, falling by 2.4%. The yen appreciated against other major currencies as investors fled to safe-haven currencies due to heightened geopolitical risk, with a lowering of US interest rate expectations also causing a rise in the yen.
The main concern during the period was the sustained acceleration of trade issues, including the announcement in May regarding severe increases in US tariffs on imports from China. These increases would likely cause a butterfly effect through the global supply chain.
Japan’s economy grew, up 2.1% in Q1, comfortably beating expectations as consensus expectations had foreseen a contraction. The Bank of Japan made no alterations to its monetary policy.
Asia (ex-Japan) shares fell slightly in the second quarter. As in Japan, investors’ primary concern centred on trade wars as the US-China trade war intensified during the quarter. China counterattacked with their own measure of tariffs. Concerns then cooled following some form of agreement being found.
Emerging market (EM) shares gained marginally in a quarter marked by high levels of volatility. As with most developing markets, particularly those in Asia, the US-China trade tensions caused markets to sell off sharply in May and rebound to a degree in June. Rising expectations that the US Fed will cut interest rates also proved supportive later in the period.
In South Africa, the re-election of the African National Congress Party boosted markets, and Russia also performed well as energy stocks rallied. Russia’s central bank loosed monetary policy and intimated this trend would continue for the remainder of the year.
Government bonds performed well as monetary policy looked set to remain accommodative, so markets saw a return to the “Goldilocks” scenario of rising bonds and equities.
In the UK, the 10-year gilt underperformed its US and German counterparts. The yield rallied in April as investors relaxed somewhat following the Brexit deadline extension and stronger than anticipated economic data.
Corporate bond markets delivered encouraging returns. EM bonds had a positive quarter. Local currency EM debt performed particularly well as the US dollar weakened in June with the Federal Reserve leaning more towards a dovish stance on rates.
In commodities it was a mixed picture. Industrial metals registered a negative return, with growing concerns over global growth. Oil fell 4.5%, despite geopolitical tensions in the Persian Gulf. Soft commodities declined, while precious metals appreciated in value, with gold in particular rallying well (up almost 10%) due to investors' concerns regarding risk assets.
We remain cautious on risk assets. We believe we are reaching the end of the current economic cycle and equity valuations will need to reflect this, particularly in the US The economic slowdown seems most pronounced here in the UK, but this may be a reflection of Brexit concerns.
We see government bonds as expensive across regions but, with the interest rate cycle turning and no further rate increases on the horizon, prices seem supported at current levels for now.