In general, April was another excellent month for investors; global financial market indices recorded 3% gains for equities, 2% for corporate bonds and 1% for main government bond markets. Once again commodities were the standout posting losses for a third consecutive month.
Fixed Income
Riskiest assets once again led the fixed income performance tables, with peripheral EU debt, high yield bonds and EMD at the top, as further central bank support and the intensified search for yield boosted prices. Issuance was very strong for both high yield and investment grade corporates and yet even poorer quality, tighter terms and the lowest ever yields failed to deter buyers. In recent months, main government bond market yields have fallen far further than most commentators had predicted. Admittedly, economic momentum has slowed and central banks continue on an easing path, but fundamentals suggest the decline is overdone. Indeed, a number of investment houses are now actively recommending shorting government bonds, especially US treasuries.
Equities
Despite the strong gains already recorded by equity markets, bulls remain in the ascendancy. The scale of the decline in bond yields and the compression in higher risk bond spreads has, to a degree, “forced” investors into equity markets. Unsurprisingly, investors have sought higher quality, higher yielding stocks with “bond like” characteristics, while economically sensitive sectors have underperformed as resource-based sector such as mining and energy have sold-off heavily. From a geographic perspective, Japan’s aggressive and expansive policy has continued to attract overseas investors, in particular, who have held underweight positions in portfolios. The performance of the US stockmarket remains key, however, as the S&P 500 has scaled new peaks and is now close to many strategists’ already upwardly revised year end targets.
Commodities
All the commodity sectors tumbled through April with energy, industrial metals and gold all down 7%. Weaker than expected economic data, especially from China, caused slowing demand concerns and oil and industrial metal inventories have jumped to new highs as supply increases. Such a background has resulted in many leading investment houses slashing commodity price forecasts but, on top of these cyclical issues, a growing number of commentators believe the sector faces deteriorating long term structural trends. Gold crashed as speculators/hedge funds exited positions, with massive sales of ETPs following Goldman Sachs’ recommendation to short gold. Goldman Sachs closed out the position a few hundred dollars lower but is still forecasting a lower gold price.
Currencies
As has been the case since last November the yen remains the main focus in the currency markets. Unsurprisingly, following the BOJ’s monetary bazooka, the yen sold-off some 7% against the dollar, albeit failing to breach the $/¥100 level. This should prove to be only a matter of time, however, as nearly all forecasters expect further yen weakens with some targeting 120! The euro strengthened alongside sterling and the ECB rate cut, being well discounted, caused barely a ripple. Recent dollar weakness, accompanying disappointing economic news, should prove temporary and most commentators expect the dollar to outperform through year end.
UK Commercial Property
The downturn in UK commercial property market capital values continued but at a receding pace. Total returns over the past three months (to end March), at an annualised 5.6%, were the highest this cycle and show a consistent improvement over the past year. Most industry commentators have turned more positive in recent months as some of the key impediments, such as finance availability, are easing and investors are moving out along the risk curve into good secondary properties. Being one of the few sources of high yield available, and with a very sizeable yield gap relative to bonds, the attractions of commercial property to yield hungry investors are increasingly obvious.
Asset Allocation
Policy action by central banks has pushed fixed income yields down to levels at which longer term losses on government securities are virtually inevitable, while further compression of corporate spreads has also considerably lowered potential returns from investment grade bonds. From an asset allocation perspective, therefore, equities are one of the few, if not only, asset class that is now capable of producing long term returns of any magnitude i.e. double digit. Commercial property is also increasingly favoured and hedge funds/absolute return funds are returning to investors’ radar screens.
