After a volatile start to the year, with falls in February and March, equity markets rallied to some extent in April.
UK
Key for April was the disappointingly weak, and lower than expected, 1st quarter GDP growth rate. The weak GDP growth reduced the likelihood of an interest rate rise in May which in turn boosted shares.
There was further good news for investors as Sainsbury and Asda, the second and third largest grocery stores in the UK, announced a proposed merger. If the merger goes ahead it will take over a year to complete and, depending on the impact on food prices, could significantly change the UK food retailing landscape and affect inflation.
In politics, Amber Rudd resigned over inconsistencies in her Windrush affair statements. Her departure may alter the delicate Cabinet balance and impact any form of customs union that may be set up post-Brexit.
Europe
The euro weakened against the US dollar, helping European stocks, but held steady against sterling.
Broad global equities recovery in April pushed most European markets higher over the month. Greek equities rode a wave of optimism on the outlook for the country’s economy as Eurozone finance ministers agreed that the EU bailout of Greece should end in August, which will leave the Greek government free to set its economic policies.
German Chancellor, Angela Merkel and French President Emmanuel Macron both visited the US for talks with President Trump, aimed partly at gaining assurances over steel and aluminium tariffs that would affect European producers.
French rail strikes were joined by Air France pilots and cabin crew taking industrial action over a pay dispute, driving Air France shares down by more than 10% during the month. It is unclear how long the current unrest will continue, or how it may spread to create a headwind for businesses across the EU.
As in other markets, European bonds were mixed, with both government and corporate bonds giving a small negative total return and longer dated bond issues achieving a marginally positive return.
Unemployment remained at a low level in France and Germany, and the figure across the EU continued to trend lower as employment data from some of the weaker economies continued to improve.
Inflation returned to 1.3% in March, after a dip to 1.1% in February, while Q1 2018 wage growth data has not yet been published.
Overall EU business confidence, measured by a survey of managers’ order book appraisals, tapered off to its lowest level since last August, while business confidence in Greece strengthened.
US
In Q1 2018, UK economy only grew 0.1% over the previous quarter, compared to 0.6% in the US with the US Federal Reserve making encouraging noises about the strength of the US economy and the faster growth rate contributing to US bond yield increases.
US interest rates are expected to rise further this year and the next with continued policies of moving interest rates back up to historically more normal levels.
Following Trump tax reforms, companies have visibility on future tax liabilities. This contributed to a sizeable increase in Merger and Acquisition (M&A) activity; global M&A deals are already ahead of the previous 2007 peak after just four months. New US tax laws have also prompted some of the largest US companies to start repatriating substantial amounts of cash, helping to finance some of the M&A deals.
Despite the remorseless rise in US shale oil production the oil price continued to increase to over 40% higher than a year ago, driven by robust global demand, the continued fall in Venezuelan output, and the perceived impact of President Trump potentially cancelling the Iranian Nuclear deal.
Japan
Japanese equities increased in April, led by more cyclical areas of the market with major banks rising as investor sentiment towards cyclicals improved following a sharp February and March sell-off.
Larger cap stocks outperformed smaller cap, likely driven by the yen which weakened against sterling, the US dollar and the euro. Currency weakness occurred as woes for the Government mounted after the release of several polls highlighting an ongoing decline in Shinzo Abe’s approval rating amid the continuing cronyism scandal fallout. Given the upcoming leadership vote in September, Investors may also be mindful about Japanese Government policy risks.
While the Bank of Japan (BoJ) retained its key policy settings in its late April meeting, it lowered its 2018 inflation outlook, removing any mention of reaching the 2% target around 2019. This shift potentially signals the BoJ extending its expectations for achieving the 2.0% target and continuing its highly accommodating monetary policy.
Emerging Markets
In a month marked by political risk and substantial returns dispersion, emerging market equities, led by India and Korea, rose 1.2% during the month (MSCI Emerging Markets Index.)
Indian markets were buoyed by heavyweights Reliance Industries and Tata Consultancy, both rising ahead of reporting positive earnings in the second half of April.
While market giants Tencent and Taiwan Semiconductor struggled, the Korean market was driven by Samsung, comprising over 20% of the index. Samsung rose in advance of announcing record operating income from robust demand in its memory segment and strong Galaxy S9 sales.
The greatest surprise was for Russian equity investors with the MICEX down 8.1% on the business day following the US imposing new sanctions against several Russian oligarchs, government officials and related companies. The sanctions include asset freezing and prohibit US persons from having any dealings with the sanctioned parties.
The implications were particularly acute for Rusal, the world’s second-largest aluminium company. When the US announced the sanctions, Rusal halved and warned of the potential for a technical default as many investors were forced to sell shares. Interestingly, by the end of the month, the Ruble bore the brunt of the impact of sanctions, falling by over 10%. Local currency investors in Russia had a smoother ride, as the MICEX quickly recovered from its loss to end the month up around 1.0%.
Our market summary reports are produced in partnership with Independent Strategic Investments.
