Month ending 31 May 2017
A constructive month for equities and bonds, with overseas assets boosted by a weaker GBP.
In GBP terms, equities gained across the main regions, with Europe leading, gaining +5.25%. US equities were the laggards, gaining +1.84%, followed by emerging markets at +2.71%.
UK equities gained +4.58% and weaker GBP flattered returns in Japan (+3.30%).
Bonds continued to rally modestly, with UK corporates gaining +1.28% and Gilts gaining +0.45%. European government bonds gained +0.62% while US government bonds gained +0.60%.
GBP reversed course against main currencies, weakening -3.54% against a strengthening Euro, -1.10% against JPY, and -0.47% against USD.
Oil declined a further -2.05%, and gold fell a modest -0.02%.
US Q1 GDP was revised up to 2% from 1.9%, while the UK GDP was revised down to 2% from 2.1%. Chinese nominal GDP data showed a strong acceleration in Q1 to 11.8%.
US headline inflation continued to pull back in April, but remained strong at 2.2%. In Europe inflation accelerated to 1.8% in April, only to slow to 1.4% in May. The UK consumer price index accelerated further to 2.7%, and Japanese inflation firmed to 0.4%.
Purchasing managers' indices (PMIs) were above the expansionary 50 reading in all key regions except China. May composite measures strengthened in Japan and the US (53.4 and 53.6 respectively), while the UK weakened modestly (54.4). While the composite measure for China accelerated to 51.5, the Manufacturing component slowed to 49.6.
Our investment strategy continues to view risk assets favourably, particularly equities where we remain overweight. However, with risk assets having run hard this year, we have slightly trimmed our exposure. This time of year is historically a weaker patch for share prices, and volatility (a measure of investor fear) remains unusually low.
We are also using this time to make a number of research trips to get a better bottom-up view of economic and earnings trajectories. These trips, and our ongoing research, may lead us to reposition portfolios into new names. Prudent profit-taking on a marginal basis is always good housekeeping in strong markets.
As multi-asset class investors, we remain well-diversified across asset classes, regions and sectors. Given the uplift in global GDP and earnings growth, we are positioned to benefit from a recovery in earnings, balanced with volatility-reducing assets should sentiment deteriorate.
At an asset class level, we remain overweight in shares (although we have trimmed this somewhat) and underweight in bonds. We maintain a small allocation to alternatives for diversification.
Our overweight equity allocation has performed well year-to-date, and we think it prudent to lock in some gains as careful profit taking on a marginal basis is always good housekeeping in strong markets. Our ongoing research may lead us to reposition portfolios into new names as we move into year-end.