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Quarterly investment commentary Q1 2017

April 6, 2017

First quarter of 2017 proves a ‘curate’s egg’ for investors

Interest rates, European elections and the prospects for the Brexit talks held investor attention during the first three months of the year, as did an improving outlook for a number of recently-troubled economies.

Those seeking to put the excitements of 2016 behind them had a number of reasons to be cheerful in the first quarter. Better economic prospects emerged in the eurozone, in Brazil and even in Russia. In what was seen as a vote of confidence in America’s economic recovery, US interest rates were raised again.

But the legacy of the previous extraordinary year continued to make itself felt. In the US, President Donald Trump looked set for a number of battles with Congress, while in the UK the saga of Brexit had only just begun. Meanwhile, China’s economic difficulties continued to mount.

What’s been happening in the UK

The post-referendum decline in the value of sterling, and consequent rise in the price of imports, including imported food, finally made itself felt in February, when the 12-monthly inflation rate went above the Government’s 2% target, increasing from 1.8% in January to 2.3%. Rather than, as may be expected, showing a decline, sterling strengthened on the back of the data as traders priced in the increased chance of a rise in interest rates to damp down inflation.

Britain’s official Bank Rate is currently at just 0.25%, the lowest level in its 323-year history.

In parallel with the inflationary fall-out from the referendum result, Prime Minister Theresa May and her colleagues prepared to begin the hard slog of negotiating the terms of Britain’s departure from the European Union amid conflicting advice from business organisations and others as to the level of access the UK should seek with regards to the single market.

Philip Hammond’s first Budget outing as Chancellor on March 8 did not prove a happy experience. A proposed rise in the National Insurance contributions paid by self-employed people was shelved after a furore triggered by claims that it breached a 2015 election promise.

The state payroll continued to shrink, with news on March 15 that there were 8,000 fewer public sector workers at the end of 2016 than there had been at the beginning of the year. By contrast, private sector employment grew by 324,000 over the same period.

What’s been happening in Europe

The eurozone economy made an uncharacteristically brisk start to the year, with signs that the enormous stimulus delivered to the 19-nation single currency bloc was starting to take effect.

On March 9, Mario Draghi, president of the European Central Bank, felt able to say: “[W]e have acknowledged the progress on the growth front, on the recovery front. We are pretty confident that … labour market conditions will improve.”

March 15 saw Dutch elections, the first of three key electoral tests in Europe this year.

What’s been happening in the United States

President Trump’s first quarter in office was every bit as melodramatic as may have been expected, including accusations  that US intelligence agencies had spied on him and the surprise failure to pass his healthcare reform bill despite his Republican Party enjoying majorities in both houses of Congress. This defeat effectively ended the “Trump bump” in share prices as Wall Street started to doubt whether he would be able to push through his planned tax cuts and increased spending on defence and infrastructure.

Falling stock prices contrasted with an economy thought sufficiently robust to withstand a rise in official interest rates – on March 15, the Fed raised the target range for the federal funds rate from 0.5% - 0.75% to 0.75% - 1%.

What’s been happening in Asia-Pacific

Japan entered the first quarter with growth supported by a weak yen, which made exports more competitive. This, in turn, bolstered consumer confidence at home. On March 20, prime minister Shinzo Abe called for a free-trade deal between Japan and the EU.

In January, the International Monetary Fund (IMF) forecast Japanese growth of 0.9% in 2016, 0.8% this year and 0.5% next year.

The Nikkei 225 had a volatile quarter, bobbing up and down between about 18,800 points and 19,600.

Elsewhere in the region, the IMF is looking for average growth of 4.9% this year and 5.2% next year for Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

Emerging markets

The outlook here was cheerier than for some time with regards to both Brazil and Russia. On February 14, Reuters reported that: “Several economists are turning bullish on a return to growth in the Brazilian economy following months of downward revisions to forecasts as slowing inflation fuels bets on aggressive interest rate cuts.”

Russia’s problems seemed far from over, but there was cautious optimism about the prospects for economic growth this year.

India shrugged off the potential hit to growth from the removal of high-value banknotes from circulation to combat corruption, but alarm bells continued to sound in China, with a sliding currency and a growing debt bubble.

Commodity prices

There was little to inspire in the commodity markets during the first quarter as they seemed to move sideways after last year’s optimism that the long downward slide was over. Brent crude oil opened 2017 at about $57 a barrel and ended the quarter at about $50, while the cash price for copper rose from $5,500 a tonne to $5,711.50.

Wheat futures rose from about 410 cents a bushel to 455.25 and maize futures from about 355 cents a bushel to 377. Gold was up from about $1,140 a Troy ounce to $1,256.

Outlook for the second quarter

Politically, the spotlight will swing to France, where the first round of the presidential election will be held on April 23 and the final round on May 7. A victory for National Front leader Marine Le Pen would threaten to destabilise the whole of the EU.

Economically, the interest rate story will continue to be a focus of attention, especially in the US and UK.

Any further difficulties encountered by President Trump with Congress will be of keen interest to investors, while the growth performances of both China and Japan will continue to be of concern. Early interest in the opening moves of the Brexit talks is likely to fade as the sheer length and complexity of the process sinks in.

Market performance

This table shows how different indices, representing different geographical regions, have performed over various time periods to 31 March 2017.

  1 year 2 years 3 years 4 years 5 years 10 years
FTSE All Share
21.95% 17.17% 24.87% 35.87% 58.66 % 73.66%
35.15% 40.79% 78.03% 98.18% 138.05% 225.86%
FTSE World Asia Pacific
34.61% 28.82% 54.28% 48.33% 72.90% 109.97%
FTSE World Europe ex. UK
27.88% 22.56% 31.72% 54.45% 82.23% 83.08%

We’ve sourced these index figures, in sterling terms, from Financial Express to 31 March 2017. The indices mentioned above are measures of the markets they represent. For example, the FTSE All-Share Index represents 98-99% of the UK market. It is the aggregation of the FTSE 100, FTSE 250 and FTSE Small Cap Indices.

You shouldn’t take past performance as a guide to future performance or as the main or sole reason for deciding to invest. It may have been achieved in a more favourable economic period that may not happen again, and tax conditions are unlikely to be the same. We don’t guarantee the value of your investment and any income you take from it, both of which can go down as well as up.

A long-term commitment

We believe it’s important, where possible, to take a long-term view when investing. Looking back over the years, volatility has always been a feature of world stock markets, with each setback followed by a recovery – some taking longer than others. The usual way to deal with volatility is to invest for the medium to long term – a period of at least five to ten years.

We strongly recommend you speak to your adviser before making any changes to your plan.

April 2017