The month of March ushered in a subtle changing of the guard, with the investment community shifting focus from the ‘Trump bump’ to an event-driven relief in Europe. This relief followed the much-talked about Dutch election, which overshadowed a series of other major events, including the official triggering of Brexit.
The Dutch election was the first of three key elections in Europe through 2017 and thus had added importance as a proxy for the French elections in April and May and German election likely to take place in October. While anti-EU populist Geert Wilders came second in the March 15 elections, winning 20 seats, it was not enough to derail a coalition being formed between centrist parties.
In a European context, this was arguably the biggest development for the month, which saw European equities produce an exceptional ‘relief rally’. While the broad European region delivered just over 4% in US dollars, the real winners were in Spain and Italy which delivered 10% and 9% respectively.
Elsewhere, the global index delivered a very modest 1% return in US dollars. Underlying this, U.S. equities showed signs of weakness for the first time since mid-2016, as the Dow Jones fell -1% over the month following central bank tightening by the Fed. Technology was among the strongest performer at a sector level, with a 3% gain, while U.S. banks unwound a strong run and were among the weakest with a loss of 4%.
Emerging markets withstood a bad month for commodity prices, rising 2% despite the broad commodity index falling 4%. On the currency front, it was a relatively benign month, with the euro ending less than 1% weaker against the US dollar and also marginally weaker against the pound sterling.
It was also a quiet month in fixed income markets. The global aggregate bond index was flat in US dollar terms, while inflation-linked securities were ever so slightly negative. The best performer for the month was emerging market local debt, which delivered a 2% return and continued an exceptional period of strong performance, up more than 7% for the first quarter of 2017 alone.
It is worth noting the firing of the Finance Minister in South Africa on the last day of the month, as the currency fell heavily and bond yields spiked, South Africa makes up approximately 10% of the emerging market local debt index.
12 Months in Perspective
In a portfolio context, it was pleasing to see outcomes in March that resembled something closer to normality. Our valuation-driven framework had led us to become progressively more cautious, as the performance of asset values and attribution from currency moves were tracking well ahead of our assessment of ‘fair value’.
To bring this to life, one only needed to reflect on how far we’ve come in the past year. Developed market equities have increased by 15% and emerging market equities 18% in US dollar terms since March 2016. If one adjusts into sterling terms, this increases to 32% and 35% respectively. It does not take a rocket scientist to realise these types of returns cannot be sustainably repeated in a long-term context.
The key in a forward-looking context is for an investor to understand the intrinsic value of an asset and how much of this value is priced in at any given time. 12 months ago, emerging market prices were trading below our assessment of fair value, an effective hurdle rate, and thus represented an opportunity to our eye. Today, this opportunity has naturally dampened following a strong rally, although still looks attractive relative to markets such as U.S. equities.
Bringing this together, we continue to caution investors against the behavioural optimism and advocate that they ignore placing too much emphasis on any monthly moves. From a market perspective, we still have a number of big events in the pipeline for 2017, especially the French election in May, and while we would love to have a crystal ball for predicting outcomes, the reality is that we must manage such event risk by having varied performance drivers that are focused on the long-term fundamentals.
“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria” - Sir John Templeton
