Investment insights

Investment Review
Month ending 31 May


Sterling weakness continued to bolster overseas returns in May, while a strong US dollar and political risk weighed on emerging markets and Europe. The US led the way in GBP terms, delivering +6.3%, followed by the UK (+2.8%) and Japan (+2.7%). Fears of tighter liquidity in US dollar emerging market debt weighed on emerging market equities, which fell -0.4%. Fears of a euro-sceptic Italian government weighed on European equities, which declined -0.6%.

European government bonds also declined in local terms, falling -1.8%, while those in other regions strengthened. UK Gilts gained +1.7%, US government bonds gained 0.9% and UK corporate bonds were flat.

GBP continued to decline against all main currencies, falling -3.8% versus JPY, -3.4% versus USD and -0.2% versus EUR. Oil showed some weakness in May, declining -2.2% in USD terms, while gold weakened -0.6%.

Investment outlook

So far, 2018 has been a mixed year for markets, with some pronounced currency movements and ongoing political risk. In Europe, political tensions continue to test the stability of the European Union. Trade friction persists between the US and China, as well as the EU. A stronger US dollar has weighed on those emerging markets with weaker fundamentals. However, the risk of higher inflation in developed markets leading to aggressive tightening appears to be receding and we expect solid economic and profits growth to continue for now.

In the current economic environment, we believe that shares can continue to outperform bonds, although we expect more modest returns and higher volatility to persist. Moreover, stock selection will continue to be key.

We remain slightly overweight equities and underweight bonds. At a regional equity level, we remain underweight UK equities. We continue to favour Europe, Japan, emerging markets and the US. Within bonds, we are keeping duration short to reflect the rising rate environment. We continue to use alternatives for diversification.

Investor insights

  • Investor Insight Spring 2018

    After an almost perfect year for returns in 2017, markets were ripe for a correction and increased volatility, and this came in spades in Q1. The catalysts were initially the prospect of tighter liquidity and anticipated interest rate rises in February, triggering the first sell off in risk assets. Markets briefly rebounded and then corrected again on fears that threatened tariffs and increased protectionism by the US could evolve into a full blown trade war. Recently markets have being moving up and down on headline news, which can be unsettling for clients.
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  • Investor Insight Winter 2017/18


    We believe 2018 will continue to enjoy strong economic and profits growth, but rising interest rates and inflation are bringing an added level of risk to markets. We believe that shares will continue to outperform bonds. However, in contrast to 2017, when returns were high and risk (as measured by volatility) was low, we expect more modest returns and increased volatility. In other words, risk assets can move higher but investors will experience more bumps along the way.

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