Month ending 28 February 2017
A buoyant month for all asset classes. All main equity regions gained in GBP terms, helped by Sterling weakness. US equities were the strongest performer, delivering +5.3%, followed by emerging market equities (+4.5%). Equities in the UK and Japan delivered +3.2% and +2.6% respectively.
A weaker EUR against the pound dragged on European equities, which still delivered +2.0%.
Bonds in main regions bounced in January, with UK Gilts appreciating the most (+3.1%), followed by UK corporate bonds (+2.7%). European and US government bonds appreciated +1.2% and +0.5% respectively in local currency terms.
GBP reversed much of the prior month’s gains against USD (-1.6%) and continued to fall versus JPY (-1.6%). However, Eurozone political risk did see GBP appreciate +0.5% against EUR.
Both oil and gold prices rallied in February, with oil gaining +2.3% while gold gained +3.5%.
Inflation measures strengthened in the US up to 2.5% in January, with China accelerating to the same rate. In the Eurozone Inflation also accelerated, increasing to 1.8%.
US consumer confidence continued to rebound strongly in February after a weaker January. January confidence numbers also improved in Japan but weakened a little in Europe.
Purchasing managers' indices (PMIs) were above the expansionary 50 reading in all main regions. January readings softened modestly in China and Japan, but strengthened in the US. The Eurozone was stable in January, but early February data shows strength.
2017 so far has seen robust performance from equity markets overall, with equities outperforming bonds. Within equities, performance has been varied across stocks, with some equities making strong gains and others participating in the rally, but only in part.
We maintain our overweight allocation to equities, given the continuation of better economic data, rising inflation, and an improvement in earnings. However, mindful of the risk of a correction, we may take profits from positions that are looking extended, and reallocate to stocks trading on valuations that offer a greater safety margin.
As multi asset class investors, we also remain exposed to bonds and alternative assets such as gold, which could prove to be ballast in volatile markets, as well as infrastructure investments that offer inflation protection and income.
Looking ahead, we continue to see reasons for optimism, though we remain cognisant of risks to growth, and political event risks ahead. We think volatility will remain a feature of financial markets. We continue to closely monitor economic data and the progress of fiscal policy, especially in the US.