Global stock markets ended the first quarter of 2018 down. Data from HSBC Global Asset Management and Datastream showed the following index returns,*
UK Equities: -7.3%
Asia Pacific (excluding Japan) -7.2%
Japan Equities: -5.5%
European Equities: -3.3%
Emerging Market Equities: -2.3%
US Equities: -2.2%
*MSCI are an independent producer of stock market indices widely used in the industry. These are total returns including re-invested dividends.
You will recall there was a sharp global stock market sell-off at the end of January and early February, and generally negative sentiment and higher volatility in evidence since then, triggered by fears of a trade war between the US and China. Property and investment grade corporate bonds also fell during the quarter whilst global government bonds rose a tad, 0.3%, in the first three months. On Monday 5th February the Dow Jones Industrial Average plunged more than 1,500 points, its biggest one day fall in history. In percentage terms however, the drop was more modest and certainly not a record.
The principal reason for the February sell-off was a fear of rising interest rates in the US caused by stronger than expected wage growth. Perversely, good economic data is sometimes viewed suspiciously by investors. Whilst rising wages should boost domestic spending and lead to a reduction in personal debt, they threaten a spike in inflation. Moreover wage growth for employees is an added cost for companies and a drag on their profits.
The first quarter of 2018 has been a wake-up call for investors who had become rather complacent given that 2017 was a very benign year with strong equity returns and very low volatility. Commentators are now calling the end of the Goldilocks economy, one that is not too hot or not too cold and doing very nicely, thank you very much. So what is the problem? When inflation bites bond prices fall and yields rise. For example the benchmark 10 year US Treasury yields recently hit 3%, for the first time since January 2014. This means investors can now buy “risk free” government debt and earn 3% p.a. so rising yields tempts investors out of equities and into bonds.
What I found surprising though is that US equities fell much less than in UK equities in Q1 2018 and less than in other markets. This is odd given the trigger for the market falls in February was an issue with the US domestic economy. When America sneezes the world catches a cold, but the US proved more resilient this time around.
To finish I thought it would be instructive to see how a number of targeted absolute return funds and cautious multi-asset funds I have recommended to clients have fared over the same period. These should have protected capital, if not in absolute terms, relative to pure equity funds. Here are the results, they are total returns including dividends or interest re-invested and are net of all fund charges:
M&G Episode Income: -0.67%
Henderson UK Absolute Return: -1.3%
Baring Multi-Asset: -2.5%
Santander Atlas Portfolio: -2.73%
Cornelian Cautious: -3.23%
Premier Multi-Asset Distribution: -3.26%.
Clearly all funds performed better than UK equites, a key comparator for UK investors, although none provided absolute capital protection over the quarter. To be fair most of these funds do not target a positive return over all periods.
The last three funds lost more than I might have expected but I don’t judge investments based on three month performance figures. A final point to make is that charges are not relevant to index returns, unlike with managed funds. In many cases these are more than 1% p.a. when transaction costs are taken into account.
The content of this blog is my own understanding of the global economy and stock markets. My comments are intended as general commentary only. Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.