The first quarter of 2018 has been one of the most challenging quarters for global asset markets since the 2008 Financial crisis. However, despite falling asset values in most developed and developing markets the global economic picture remains healthy with robust growth figures being reported worldwide.
After a substantial rally in 2017, US stocks have dropped by 10% since their highs on the 26th of January; the Dow jones is down by 2,684 points. However, much of this drop can be explained by simple profit taking from last year’s bull market which was the biggest since 1987. Bonds have also continued to underperform in the US on concerns that the US economy is overheating, and higher inflation will lead to higher rates.
Ultimately, we see the events of Quarter 1 as a positive; there was no doubt that the market had risen too much and a moderate contraction in asset prices will likely serve to release dangerous pressure from the market. The underlying economic picture remains healthy with record high employment levels. There may be a need to consider selling down in 2019 but for now, moving away from tech stocks and towards more traditional companies and shorter-dated bonds would seem to be enough of a defensive play.
Trump’s looming trade war with China may also cause concern, however we feel that it is likely to be a short spat between China and the USA which will ultimately dissipate with only minor economic impact.
UK stocks have finished an abysmal year with the FTSE 100 dropping by 9% since a brief high on the 12th of January. This has been caused by concerns over future Brexit deal, a rising pound and concerns over future interest rate rises affecting high-quality assets. At today’s prices FTSE 100 stocks are at the same levels they were at May 2015, nearly 3 years ago.
However, with the political capital gained by the UK over the poisoning of an ex-Russian spy it seems a decent Brexit deal is increasingly possible. While we expect to see the pound rising further we may also see an uplift in key resource and financial companies that make up much of the FTSE 100.
As growth continues to slow and Europe continues to experience the rise of alternative political parties we expect to see European assets and the Euro under-perform.
The contraction in offshore US dollar liquidity will continue to pose a threat to emerging markets, especially those linked to China and Hong Kong. However, global growth remains strong and we expect to see broad-spread EM assets perform well.
All the best
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