Month ending 30 June 2017
A lacklustre month for equities and bonds, with bonds and some equities selling off.
In GBP terms, equities fell in the UK (-2.57%) and Europe (-1.36%) and traded flat in other regions, with GBP strength holding back returns.
Bonds fell across the board, with hawkish rhetoric from a number of central banks. Gilts were the laggard, falling -2.07%, while US government bonds fell only -0.08% in local terms.
Oil declined a further -4.72% and gold fell -1.89%.
In June members of the US Federal Open Markets Committee voted once again to raise interest rates by 25 basis points to 1.25%. Composite Purchasing Manager’s Index (PMI) data remains around 53, indicating continued expansion. Inflation continued to decline in May, falling to 1.9%.
China activity measures continued to slow, with the Caixin PMI dropping below 50 in May, then rebounding in June. Inflation climbed back to 1.5% in May.
In Europe, PMIs peaked at 56.8 in May, softening to 55.7 in June – still a strong reading. CPI continued to soften to 1.2% in June, giving ECB officials more flexibility to keep policy loose.
While global inflation measures have subsided, UK CPI continues to rise, reaching 2.9% in May, boosted by renewed GBP weakness but activity measures remain in expansionary territory. The path of policy rates has become more uncertain, as rhetoric from the Bank of England has become increasingly hawkish.
In Japan, Q1 GDP softened, as expected, delivering 1.3% on the year although activity measures point to strength, with the composite PMI rising to 53.4 in May and CPI stable at 0.4%.
Markets have been good to investors this year, with shares in particular delivering strong performance in absolute returns. Asset prices have responded positively to economic data that has in general been better than expected. Some areas of the world, like Europe, have shown a surprising improvement since last year. We believe that we are seeing a global synchronised improvement on the economic side that is broader based in nature than before.
Better growth has reflected well in earnings of companies and securities that we hold. Meanwhile, inflation remains fairly benign and fiscal and monetary policies are still supportive of risk assets. Political stress so far has not materially dampened this improving pace of growth.
Taking this into account, our view remains constructive. We continue to think shares will outperform bonds this year and that stock selection and active management will continue to add substantially to returns. However, we are mindful that markets have priced in a lot of good news already. Continued economic and earnings data will naturally slow as time progresses.