“Elections, elections, elections” as goes the market hyperbole. There is no doubt that sentiment in April was dominated by the perceived election relief in France and the U.K. surprise announcement of a snap election in early June.
Donald Trump’s tax reform proposal lacked sufficient detail to move markets
This created a tale of two halves for the month, with initial nervousness for the European Union turning into optimism. Expressly, the first round of the French elections proceeded according to the polls, meanwhile Theresa May is generally expected to solidify the Tories’ lead in the Commons and tighten her grip on Brexit negotiations. This gave sterling and the euro a welcome boost, jumping more than 3% and 2% respectively against the US dollar.
This seemed to overwhelm most other developments, with Donald Trump’s tax reform proposal lacking sufficient detail to move markets and geopolitical tension in a continual state of flux. On the data front, a strong divide became noted in the ‘hard versus soft’ data debate, with hard data generally disappointing, at least temporarily.
Particularly, U.S. Q1 GDP growth came in at a three-year low of 0.7%, quarter-on-quarter annualised, which was a stark contrast to business and consumer confidence surveys that remain near cyclical highs.
For equity markets, it all seemed to come back to geopolitical uncertainty, with a positive interpretation of the French election first round result boosting returns at the end of the month. The European markets shifted into overdrive as ‘risk-on’ selections such as the banks and even Greek equities rose sharply.
In the U.K., the currency impact also contributed to a large divide supporting domestically-oriented mid and small cap companies over large caps. However, when considered in aggregate, both developed market and emerging market equities posted subdued returns that ended negative in sterling terms, while mildly positive in US dollar terms.
By sector, healthy corporate reporting ensued among big tech, especially in the U.S., which curiously remains a favoured destination of capital for investors for its perceived ‘growth certainty’. warns thaHistoryt this can be a dangerous assumption. On the other hand, energy and mining have continued to struggle as raw commodity prices were the laggard, with crude oil prices falling for a fourth consecutive month on concerns over rising U.S. output.
Within fixed income, a similar theme of European uncertainty stood out in a relatively quiet month. Most markets held on to their early April gains despite the sell-off seen in the aftermath of the French election first round result. Elsewhere, emerging market debt and high yield performed slightly better than the global aggregate, but both ended in the 1-2% range.
Backward Look: 12 Months of Markets
If one takes a step back and thinks about the market as a pendulum between fear and greed, it is hard to deny that greed is the irresistible preference for many investors at present. It is a market that is increasingly growing on hope and further growing on the news, irrespective of the outcome.
A classic example is the rally that arose following the Donald Trump election victory. Specifically, the market rallied on the prospect of better economic growth; citing fiscal reform, looser regulations and infrastructure spending, then has rallied further despite blocks in congress and GDP coming in at its slowest rate for three-years; citing weather related excuses.
Investors need a far longer timeframe to fully understand the ‘Trump effect’, but his first 100 days showed the problems in extrapolating a political change into fundamental progress. From our perspective, we remain firmly focused on the latter.
Under this influence of optimism and excitement, the leaderboard has unsurprisingly been dominated by three key stories: technological growth, emerging market positivity and currency. To put numbers on paper, global tech has rallied 51% in sterling terms and 34% in US dollar terms. Emerging markets aren’t far behind, rising 35% and 19% respectively.
This is a remarkable development that requires a very watchful eye. It becomes increasingly healthy to view such strong advances with scepticism, especially when the fundamental baseline isn’t shifting in sync. Many investors are failing to acknowledge the impact this has on valuation-implied returns, and that the stellar historical performance is akin to borrowing returns from the future.
Going forward, this requires pragmatism and patience combined with discipline and direction. We must remain fixated on the markets with the most attractive valuations and avoid the short-term noise that is misguiding those with good intentions. It is a difficult backdrop to deal with, however long-term valuation-driven investing remains the name of the game.
