February 2017 asset class returns

3 March 2017

2017 has started well for investors with stock markets climbing to new highs, while bonds also posting gains. The bond gains probably need to be seen as a bounce back from oversold levels, following the sharp sell-off in the last quarter of 2016. Equities around the world have been buoyed by a combination of further improvements in corporate earnings and a surprise continuation of rising business and consumer sentiment.

Asset Class Index February 2017
Equities  FTSE 100 (UK) 3.1% 2.5%
 FTSE4Good 50 (UK Ethical Index) 2.7% 1.3%
 Dow Jones Euro-Stoxx 50 (Euro-Zone) 2.3% 1.1%
 Standard & Poors 500 (USA) 5.1% 5.2%
 Nikkei 225 (Japan) 2.1% 3.5%
 MSCI All Countries World 3.7% 4.6%
Bonds  FTSE Gilts All Stocks 3.1% 1.3%
 IA Sterling Corporate Bond Index
 Barclays Global Aggregate Bond Index 1.6% 0.9%
Commodities  Goldman Sachs Commodity Index 1.3% -1.9%
 Brent Crude Oil Price 0.9% -2.9%
 LBMA Spot Gold Price 5.6% 7.3%
Inflation  UK Consumer Price Index (annual rate) -0.5%
Cash rates  Libor 3 month GBP 0.03% 0.1%
 Property  UK Commercial Property (IPD Index) 0.7%
* Source: Morningstar, all returns in Pounds - Sterling (£ - GBP)

Added to these positive factors, the world is for the first time since the immediate recovery from the Global Financial Crisis (GFC), displaying synchronised economic growth without major structural headwinds like the unwind of the commodities bubble of 2015/2016.

This encouraging outlook is overshadowed by political risks. The unorthodoxy of the US populist president Trump has sent shudders around the world and the prospect of further populist shifts in major European election during 2017 also sits uneasy with the more positive outlook.

For the moment the jury is out, whether the economic momentum that has built up since April/May last year will overcome political headwinds as it did in 2016, or whether we will witness a major paradigm shift against trade and globalisation. At the end of February, it seemed as if the 2016 mood would be set to continue for a while into 2017. This mood seems to be carried by the belief that political pressures will lead to reduced fiscal austerity headwinds, but radical political shifts will not necessarily lead to radical policy changes to the detriment of the global economy.

At Tatton we see the odds as fairly balanced which leads us to maintain our neutral asset allocation positioning between riskier growth assets and lower risk fixed interest bond assets. However, at the regional and currency level we see significant differences in relative valuations, with considerable catch-up potential in some areas.

Sadly, as is often the case when things are running just fine in the world of investment returns, sudden setbacks have to be factored in. In years past that displayed similarities in setting with 2017, stock markets have sometimes suffered sudden and painful corrections. A policy error or failure of judgment on the political side could well interrupt the current strong market dynamics. For this reason and mainly this reason, we are hanging on to long duration bond positions which we do not expect to provide much upside over the medium term, but could once again prove to be very useful counterbalancing portfolio elements, when growth assets hit a stretch of unpleasant bumps.

However, this also means that those seeking to gradually withdraw funds from their invested savings over the shorter term may be well advised to plan ahead a little more than used to be necessary. A temporary cash position to cover some 12 or 24 months of future cash requirements (or longer, depending on one's attitude to risk), so as not to be forced to having to liquidate parts of the portfolio when markets hit the next bout of volatility, may well be a prudent move of forward looking financial planning.