Review of markets over April 2017Contributor Global Markets Insights Strategy Team
For investors, the main market event in April was undoubtedly the first round of the French presidential election. Markets rallied in relief as centrist candidate Emmanuel Macron made it through to the second round. Combined with the victory for the incumbent prime minister in the Netherlands in March, and the calm market reaction to the triggering of Article 50 by the UK government, many investors are hoping that April represented the high water mark for European political risk, and that a wave of relief can now buoy equity markets.
However, April’s relative asset class performance shows that investors moderated their optimism on growth, and their predictions for higher inflation. Bonds almost matched the return from equities whilst growth outperformed value (Exhibit 1), revealing renewed caution over the upside in markets as some of the strength of global soft data fell away. The US administration failed to make any significant headway on its reflationary reform agenda, and global tensions dominated our television screens. In the end, this backdrop worked in favour of those broadly invested in markets in the month of April, with both equities and fixed income making gains.
EXHIBIT 1: ASSET CLASS AND STYLE RETURNS (LOCAL CURRENCY)
Source: Barclays, Bloomberg, FactSet, MSCI, J.P. Morgan Asset Management. REITs: FTSE NAREIT All REITs; Cmdty: Bloomberg UBS Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSC World Small Cap. All indices are total return in local currency. Data as of 30 April 2017.
We may well look back at April 2017 as the turning point for European equities in terms of their performance relative to the rest of the world. Clients have long questioned how much further the US equity market could rise and its valuation relative to other options and in the developed world, particularly in Europe. With Europe now moving past some of its biggest flashpoints for risk, it is possible that an era of sustained outperformance by European stocks may now be beginning. After all, the economic backdrop has steadily improved over recent years, the currency remains competitively valued, policy is supportive and both margins and earnings remain depressed. However, it would be foolish to sound the all-clear too early. The second round of the French elections on 7 May could still produce a shock, Brexit negotiations will be fierce and the Italian elections may soon return to our focus.
Elsewhere in equities, April saw emerging market stocks continue their outperformance against their developed market brethren (Exhibit 2)—a trend that has now lasted more than a year. This outperformance, even as commodity prices weaken, shows that emerging market companies are no longer as commodity-dependent as they were just a few years ago. Indeed, there is growing evidence that emerging markets are benefiting from a renewed domestic growth dynamic, and we expect this to drive outperformance in coming quarters.
EXHIBIT 2: WORLD STOCK MARKET RETURNS (LOCAL CURRENCY)
Source: FactSet, MSCI, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency. Data as of 30 April 2017.
April also made it clear once again that reports of the death of fixed income have been greatly exaggerated (Exhibit 3). Geopolitical tensions and political gridlock in the US led to reduced growth and inflation expectations, which drove regular and inflation-linked bond prices higher, and their yields lower. With credit performing well, investors are not anticipating a major slowdown—simply a less marked acceleration than they expected only a few months ago.
EXHIBIT 3: FIXED INCOME SECTOR RETURNS (LOCAL CURRENCY)
Source: Barclays, BofA/Merrill Lynch, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. IL: Barclays Global Inflation-Linked; Euro Treas: Barclays Euro Aggregate Government - Treasury; US Treas: Barclays US Aggregate Government - Treasury; Global IG: Barclays Global Aggregate - Corporates; US HY: BofA/Merrill Lynch US HY Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial HY Constrained; EM Debt: J.P. Morgan EMBI+. All indices are total return in local currency. Data as of 30 April 2017.
Going forward, we maintain our overweight to equities over core fixed income. Resilient, if not rapid, global expansion should keep supporting the equity market as low rates and further central bank bond purchases continue to depress bond yields (Exhibit 4).
EXHIBIT 4: FIXED INCOME GOVERNMENT BOND RETURNS (LOCAL CURRENCY)
Source: FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. All indices are J.P. Morgan GBIs(Government Bond Indices). All indices are total return in local currency. Data as of 30 April 2017.
EXHIBIT 5: INDEX RETURNS FOR April (%)
Source: MSCI, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management; Data as of 30 April 2017.
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