Month ending 31 March 2017
After strong gains in February, March was a more subdued month for markets.
In GBP terms, equities gained strongly in Europe (+4.27%) and emerging markets (+2.23%), while UK equities gained +1.19%. US equities were undermined by a weaker Dollar, with a modest decline in GBP terms (-0.34%). Japanese equities were the laggards, declining -0.89%.
UK bonds rallied modestly, with Gilts gaining +0.35% and UK corporates gaining +0.18%. European government bonds gave up -0.53% while US government bonds were flat.
Having weakened in February, GBP strengthened against main currencies, gaining +1.37% against USD, +0.62% against EUR and +0.15% against JPY.
Both gold and oil declined over the month. Oil declined by -6.31%, while gold fell -0.86%.
Q4 GDP readings were broadly positive. Annual GDP growth accelerated in the US and Japan to 2% and 1.6% respectively, though it slowed modestly in the UK and Eurozone to 1.9% and 1.7%.
Chinese inflation slowed significantly in February, falling to 0.8%. Inflation continued to strengthen in the UK, with February CPI reaching 2.3%. In the US, headline CPI strengthened further to 2.7%, though core inflation weakened. Japanese inflation slowed a touch, and early March Eurozone inflation data shows a slowing in both core and headline inflation measures to 0.7% and 1.5% respectively.
Purchasing managers' indices (PMIs) were above the expansionary 50 reading in all key regions. March composite measures strengthened in the Eurozone and China, while Japan weakened modestly. Larger declines were seen in the US and the UK, although readings remained high.
Our investment strategy continues to be constructive on risk assets, particularly equities where we remain overweight. As we enter the second quarter, the improvement in economic momentum witnessed at the start of 2017 looks to be firming across the developed and emerging world, providing a better environment for earnings growth. This better economic backdrop, a moderate acceleration in inflation and a supportive policy mix are all equity-friendly.
Near term risks to equity markets remain. Stocks have appreciated strongly year to date and we anticipate a potential period of consolidation. Political events are the most likely catalysts for a pullback.
While we remain cognisant of the potential risks, we expect economic momentum to prevail for now. We believe a better growth environment will allow equity markets to trade more in line with their fundamentals.
While the first leg of the equity rally was concentrated in the US, we expect the current period of wider-spread participation to continue. Across markets - and provided the current supportive conditions persist - we view any pullback as a potential buying opportunity to add to favoured shares or areas of the market.