Quarterly Market Update

Nervousness in the equity markets remained high during the second quarter of the year. Indeed, after correcting in the first quarter, global equities bounced back by about 3% until mid-June before some profits were taken again. The S&P 500 gained 2.9% over the second quarter (+1.7% YTD), +6.3% for the Nasdaq (+8.8% YTD), +1% for the Euro Stoxx 50 (-3.1% YTD), +7.1% for the FTSE 100 (-0.7% YTD) and +4% for the Nikkei 225 (-2% YTD). Emerging markets were also on a rollercoaster this quarter. China’s CSI 300 lost 9.9% (-12.9% YTD) and Brazil’s Bovespa dropped 14.8% (-4.8% YTD).


This nervousness was due to geopolitical uncertainties, as well as ongoing concerns over a potential escalation in the trade war between the US and the rest of the World (the US administration implemented a USD 50 billion tax on imports from China). Over the quarter, President Trump repeatedly mentioned his will to impose taxes on imported goods, which led to similar speeches from leaders in other countries. On the macroeconomic front, the environment remains sound in the US while the economic picture in Europe has faded somewhat. For instance, this has led to a slight decline in the German business sentiment index in June to 101.8 from 102.3 in the previous month.


No real surprises came from central bank meetings over the quarter. The US Federal Reserve (Fed) increased its benchmark interest rate during its June meeting by 0.25%. During the meeting, Fed Chairman mentioned targeted inflation was still 2%, though further rate hikes are to be expected during the rest of the year as inflation reached 2.8% annualized in May. The European Central Bank (ECB) left interest rates unchanged. As largely anticipated, the ECB announced the end of its bond-purchase program by the end of the year, though any interest rate hike should not occur before summer next year. The Bank of England (BoE) maintained the rate at 0.5%. The BoE may start to increase interest rates sooner than the ECB, in our opinion, as inflation in the UK reached 2.4% vs. 1.99% in the European Union. Market nervousness and interest rate increases by the Fed pushed yields higher over the quarter. The US 10 year yield increased as high as 3.11% in mid-May before coming back to end the quarter at 2.85%.


Taking all this into account, our strategy remains largely unchanged. We believe the overall macroeconomic environment will remain sound and neither the trade war nor further interest rate hikes by the Fed will lead to a recession. Solid earnings growth will continue this quarter, as it was the case in the first quarter. We believe the recent weakness in equity markets will prove to be a consolidation phase after the sharp increase, as from April’s trough to June’s peak, the S&P 500 gained 7.9%.


Therefore, we continue to favour equities over other asset classes, with the US remaining our favourite region. Within equities, we like cyclicals overall, such as Information Technology (I.T.), as well as Financials. As far as the latter are concerned, we believe companies in this sector should benefit from higher interest rates on the top of a sound macroeconomic environment. Solid economic growth and secular trends in the “Internet of Things” should support the I.T. sector. Industrials should do well too, though we believe they are more exposed to uncertainties linked to the news flow over the trade war that may last until the US mid-term elections in November.


As far as fixed income is concerned, we remain neutral overall, avoiding long maturities and the high-yield segment. We believe prices of bonds with long maturities will continue to be pressured and lower-quality companies may face some difficulties to service their debt in a higher interest rate environment. Consequently, our exposure to the fixed income asset class remains on the Floating Rate Notes (FRN), as well as short-maturity bonds.


The major surprise during the quarter came from currencies. The US Dollar gained against the Euro and the British Pound after weakening macroeconomic data came from Europe. The Greenback appreciated by 5.5% and 6.1% against the Euro and the British Pound respectively. However, we believe the 2017 trend will regain traction in the foreseeable future and thus, we are still keen to have some Euros in our USD portfolios. This appreciation was similarly reflected against the South African Rand, increasing 16% over the same period.


The US abandoning the Iran nuclear deal was another source of worry for investors, leading the oil price higher. The Brent ended the quarter at USD 79.12/brl, while the West Texas Intermediate (WTI) reached USD 74.26/brl, a new high since 2014. As oil prices increased, precious metals, such as gold and silver, lost some ground. Gold closed the quarter at USD 1’252.70/oz. (-5.5% in second quarter) and silver at USD 16.8/oz. (-1.5%).


All that said, we believe equities should do well, though investors should be aware of the comeback of volatility and that 2018 is not likely to be a copy of 2017. Rhetoric over trade war, tensions within European governments over immigration policies and the US mid-term election by year-end are likely to generate some noise. Therefore, some cautiousness is essential, but we do not believe the adage “sell in May and go away” will prove to be correct this year, as we believe solid companies’ earnings will come back at the center stage for investors.



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