Discretionary Investment


First Quarter 2017

Report as at 31st March 2017

The first quarter of 2017 has shown continued strength across all asset classes, and the gradual ‘grind’ higher is in sharp contrast to what we saw this time last year, when investors sold equity markets in particular, as the rout in commodity prices continued.  Investors were also then concerned about a slowing China and the ramifications that had for its neighbours and for the global economy. However, both these issues have since stabilised. Volatility has fallen sharply in most markets.

Clearly what we know now, that we didn’t know a year ago, is that the UK would vote to leave the EU and that Trump would become the 45th President of the USA. Both these events have not derailed markets in a way that we, and others, might have anticipated. Selectively we have seen both the positive and negative effects of these votes start to hit certain stocks, sectors and assets, but in general, synchronised global growth has led to continued confidence in most markets.

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  • All regions of the world look set to deliver economic growth in 2017. In the US, consensus GDP estimates are for growth of 2.2%, and for 2018 growth of 2.3%. European growth forecasts have risen to 1.6% from 1.4% for 2017. Asia ex Japan is expected to grow by 5.8% this year. Globally, estimates are for growth of around 3.2% in 2017 rising to 3.4% in 2018.

  • Continued weakness in Sterling means that inflation will rise in the UK to near 3%. Imported inflation is an exogenous factor which means that it will not necessarily lead to rises in the Bank of England Base Rate. Mark Carney and the other members of the Monetary Policy committee are likely to err on the side of caution when raising rates, given the uncertainties over Brexit.

    The tight labour market in the US, which is seeing record levels of employment, means that wages have started to rise. The Fed raised rates for the first time in a decade in December 2016, and followed this with a further 0.25% rise in March 2017 to 1%. With two further rate rises expected, rates could reach 1.5% by the year end. This is still well below trend levels.

    European economies are still likely to benefit from quantitative easing and inflation and interest rates are likely to remain low, although we do not anticipate significant further liquidity easing as the economies recover.

  • Despite the strength in equity markets, we continue to have an overweight position in portfolios. Indices have been led up by strength in the banking and commodity sectors, but this leaves opportunities in other stocks with strong balance sheets and good growth characteristics. We are seeing earnings upgrades, particularly in our Sterling holdings, where our weaker currency translates to higher earnings and higher potential sales growth from overseas. Equities continue to provide a good hedge against inflation, and also a growing dividend component which is a vital factor for total equity return.

  • Conventional Gilts fell back towards the end of 2016 and early 2017, but have since strengthened again. They remain expensive on most valuation metrics. Index Linked stocks rallied after Brexit, as Sterling weakened, but are around fair value at current levels. Corporate bonds have had a strong quarter.

    The supply side of the equation has also become more relevant in 2017. Until now, quantitative easing programmes have led to massive bond buying programmes by Central Banks. However, the infrastructure projects that Trump wishes to put in place could lead to a greater supply of particularly longer-dated government bonds. This will put downward pressure on prices (upward pressure on yields). However, Trump needs to get his spending plans through Congress and, as we have already seen, this is not plain sailing. Yields on US Treasuries are far above those of European and UK comparables – with yields on the US 10 year Treasury at over 2% , German Bunds at only around 0.25% and UK Gilts at 1.1% at the end of the first quarter.

    Bonds continue to provide some ballast in times of market uncertainty, as we have seen many times over the last few years – Brexit, the Eurozone debt crisis and the financial crisis of 2009. Therefore they still earn a place in portfolios for investors who do not wish to carry only equity risk.

  • We look to generate stable returns for our clients by diversifying across different asset classes and buying well-managed companies and collective funds. 

Please remember that the value of investments and the income from them may go down as well as up and that you may not get back the amount originally invested. Past performance should not be seen as an indication of future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.

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