Month ending 30 April 2017
Sterling strength subdued equity gains in April, while bonds gained modestly.
In GBP terms, equities weakened across the main regions, except for Europe, where equities gained +0.57%. Japanese equities were the laggards, declining -4.28% on Yen weakness, followed by emerging markets (-2.29%).
US equities were also undermined by a weaker Dollar, with a -1.89% decline in GBP terms and UK equities fell -0.68%.
Bonds rallied modestly, with UK corporates gaining +1.07% and Gilts gaining +0.98%. European government bonds gained +0.63% while US government bonds gained +0.86%.
GBP continued to strengthen against main currencies, gaining +3.27% against JPY, +3.20% against USD and +0.91% against EUR.
Oil declined a further -2.51%, while gold gained +1.74%.
As is often the case in Q1, early GDP measures were modestly weaker than the prior quarter in the US (1.9% vs.2.0%) and Eurozone (1.7% vs. 1.8%), while weaker data from the start of 2016 rolling out flattered the UK reading (2.1% vs. 1.9%).
Headline inflation pulled back from the February peak in the US, but remained strong at 2.4%. In Europe and the UK the consumer price index was stable at 1.5% and 2.3% respectively , while Japanese inflation softened to 0.2% from 0.3% in February.
Purchasing managers' indices (PMIs) were above the expansionary 50 reading in all key regions. April composite measures strengthened in the Eurozone and US (56.7 and 53.2 respectively), while Japan and China weakened modestly (52.6 and 52.1).
Our investment strategy continues to view risk assets favourably, particularly equities where we remain overweight.
Given that US companies currently command a premium, in some cases we find more value elsewhere. Across markets, should current conditions persist, we see any pullback as a potential buying opportunity to add to favoured shares or areas of the market and we have modestly increased cash for this reason. We have added modestly to UK assets given the increased likelihood of a GBP appreciation, though we recognise that economic data and political murmurs could cause volatility.
We have further trimmed our US position, where valuations have increased significantly, and redeployed this capital in other markets ( where economic data is improving and valuations offer a more attractive upside) and into cash.
Whilst we remain cognisant that risks to growth remain, we think that economic momentum can prevail for now. In this context, we seek assets that can benefit most from a better environment for GDP and earnings growth, balanced with a slight reduction in overall risk as we enter the often-turbulent summer months.
As multi-asset class investors, we remain well-diversified across asset classes, regions and sectors. Given the better outlook for economic and, hence, earnings growth, we believe that we are positioned to benefit from a recovery in earnings, balanced with volatility-reducing assets in case sentiment deteriorates. At an asset class level, we are overweight in shares and underweight bonds. We maintain a small allocation to alternatives for diversification.