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Quarterly Market Update

The first quarter of the year saw equity markets correct sharply from a strong start in January on growing inflation and trade war fears, a spike in bond yields along with technical factors related to an overbought market following an historically long period of low volatility in 2017. This is now behind us, especially in light of recent trade frictions.

The US Federal Reserve (“Fed”) raised interest rates in March as expected by 0.25% with two to three more similar hikes expected in 2018. The European Central Bank (“ECB”) should end its bond buying program by the end of the year and will likely raise interest rates in 2019. The Bank of England (“BOE”) left interest rates unchanged on 21 March but hinted at a hike of 25bp on 7 May.

Over the quarter, the S&P 500 -1.22%, Nasdaq Comp. +2.32%, FTSE 100 -8.21%, Euro Stoxx 50 -4.07%, SMI -6.83%, ASX 200 -5.04%, China’s CSI 300 -3.28% and Hong Kong’s Hang Seng +0.58% while the Nikkei 225 -5.76%.

We prefer US, European and emerging market equities. Technology remains a favoured sector to secular growth trends in cyber security, cloud computing and e-commerce. Bond markets have been under pressure in this rising interest rate environment as inflation is also starting to pick up in the USA, albeit modestly.

There will likely be moderate economic growth in the USA and strong EU growth along with improving earnings in the US. Tax relief and a fiscal spending package will aid US companies. The US economy is near full employment with a 4.1% jobless rate and the economy will grow at a moderate pace with S&P500 earnings growth of 5% in 2019 after the short term boost in 2018 from tax cuts. European companies with their cyclical bent will benefit from global demand.

China is expected to grow at 6.6% in 2018 and to continue to manage its slowdown with increased monetary, political and economic stability. Emerging markets are attractive on global synchronized growth.

The main risks remain political (US) with the probe into alleged Russian involvement in the US presidential elections still ongoing and the recent imposition of tariffs on aluminum and steel threatening a possible trade war with China.

Sterling is unlikely to fall from current levels meaning currency tailwinds for UK stocks will fade too. Prospects for UK shares have dimmed in the post Brexit environment of uncertainty.

The rand lost some ground over the quarter falling nearly 4% to 11.83 to the USD.

Oil prices rose modestly over the quarter with Brent +4% to US$ 69.34 with some limited upside due to reduced supply from OPEC and Venezuela.

Gold rose some 2.3% to US$ 1’320.-/oz on increased safe haven demand post equity and bond market volatility. Platinum was largely unchanged at US$ 932.-/oz having traded above US$ 1’000.- in late January with palladium preferred in the PGM sector due to reduced demand for the former metal following the VW diesel emissions scandal.

Disclaimer

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06.04.2018