Our strategists summarise market performance and the outlook for next month.
Global equities advanced over the month, as robust earnings results and better than expected economic growth bolstered investor sentiment.
US stocks moved higher after the US Senate passed a budget vote that lawmakers expect will pave the way to a tax overhaul deemed critical to Republicans’ prospects in elections next year. The US economy grew by 3% in the third quarter, beating forecasts of a 2.5% expansion.
European Commission president Jean-Claude Juncker said that the UK would need to pay its “divorce bill” before discussions can proceed on trade and future relations between the UK and the European Union. Meanwhile, the International Monetary Fund singled Britain out as a “notable exception” to an improving global economic outlook – slashing the country’s long-term growth outlook.
The European Central Bank reduced its quantitative easing scheme to a monthly pace of €30 billion from January with the option of extending it beyond September 2018. That amount is down from the current €60 billion-a-month buying pace.
The UK economy expanded faster than anticipated over the third quarter, increasing the likelihood of an interest rate hike at the Bank of England’s next Monetary Policy Committee meeting.
In terms of regions, valuations remain expensive in the US and as such, we still believe that other regions remain more attractive.
As expected, the Bank of England has increased interest rates by 0.25 percentage points to 0.5% - the first rate rise since 2007. We believe this rate hike will be moderately negative to the UK’s economic outlook, especially to the consumption and housing sectors, and this could become a headwind factor for UK equities.
2.Vickers' video: Positioning portfolios for change
Senior Portfolio Manager David Vickers asks whether the second-longest bull market in history is coming to an end….and if so, how best to prepare.
3.Chart of the month: Benefits of diversification
With speculation about when the FED will increase interest rates, and the likely impact, see how different asset classes have responded to past rate rises.
There has been much speculation about when the FED will increase interest rates, and its impact on markets and asset classes.
This chart shows how different asset classes have responded to FED rate rises that are both greater than 1% (grey diamond) and less than 1% (blue triangle) over the last 37 years, with the blue bar showing average annualised return.
The key takeaway is that the results of different asset classes are mixed with equities performing well when interest rates rise, and bonds, conversely, and unsurprisingly, performing less well.
The orange bar at the end of the chart, shows Russell Investments Multi Asset Growth III (MAGS III), which incorporates both asset classes and more, indicates that performance, when FED rates rise, has been a lot more stable than standalone asset classes, with the triangle and diamond nearly overlapping to give a similar return to the annualised return.
RELATIVE MARKET RETURNS OVER ONE YEAR OF FED FUNDS RATE INCREASES
(Annualised % January 1980–March 2017)
Source: Equity: MSCI World Index, Bonds: Bloomberg Barclays Aggregate Bond Index; EM Eq: MSCI Emerging Markets Index (Jan 1988 – Mar 2017); REITs: FTSE NAREIT Equity Index, High Yield: BofA Merrill Lynch U.S. High Yield Index; EMD: JP Morgan Emerging Markets Bond Index (Jan 1992 – Mar 2017); Commodities: Bloomberg Commodity Index (Feb 1991 – March 2017); Gold: Bloomberg Commodity Gold Index (Feb 1991 – Mar2017); Gold Stocks S&P Gold Stock Index; Balanced: 50% Stocks, 30% Bonds, 5% REITS, 5% High Yield, 5% EM, 5% Commodities
Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
Adviser Top Three Talking Points
1. Multi asset key market highlights
Global equities enjoyed a positive end to the year, after a plethora of central bank decisions and the US House of Representatives and Senate approved the most sweeping overhaul of the US tax system in more than three decades.
The US Federal Reserve (Fed) raised the federal funds target to 1.25%–1.5% as widely expected and noted that it sees an additional three hikes in 2018. Meanwhile, both the European Central Bank (ECB) and the Bank of England kept benchmark rates on hold.
Prime Minster Theresa May’s progress on Brexit suffered another setback after lawmakers voted by a narrow majority to have the power to veto the final deal struck between the UK and the EU prior to Britain’s withdrawal from the EU.
Global Equities: Neutral, with an eye on the asymmetry
Value: High prices create lopsided risk-reward
Cycle: Recession risk a theme for H2 2018
Sentiment: “Most hated bull market” – still no euphoria
Prefer Emerging Markets and eurozone over US
Treasuries and credit expensive, leaning out of HY
Reduction of QE a structural negative
Fed: Three more rate hikes in 2018
2. Global Market Outlook: Infographic
See why Russell Investments believes the current bullish momentum will face strengthening headwinds as 2018 progresses.
As markets evolve, investment returns have become more complex to produce providing investors with a challenge. Historically low interest rates have seen low risk investors struggle to achieve returns without taking more risk as the chart below illustrates.
The chart below shows what it would take to achieve a 7.5% return in 1995, 2005 and 2017 together with the standard deviation. As you can see a 7.5% return in 1995 could be achieved by investing 100% in bonds and with a 6% standard deviation – compare that to 2005 when the 7.5% return would require 52% in bonds and 48% in 3 other asset classes, equities, real estate and private equity. Moving on to 2017, using the same capital market assumptions, a 7.5% return would need 86% in equities, real estate and 14% in bonds with standard deviation increasing almost three times!
Diversification across multiple asset classes is key in producing returns in the current investment environment as the chart below shows. We are keen to discuss our solutions with you, please feel free to contact us to find out more.
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Unless otherwise specified, Russell Investments is the source of all data. All information contained in this material is current at the time of issue and, to the best of our knowledge, accurate. Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice. Opinions expressed by readers don’t necessarily represent Russell’s views.
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