Month ending 28 February
A challenging month for all asset classes, characterised by high volatility, weaker asset prices and strengthening safe haven currencies.
UK equities were the laggards in February, falling -3.3%, with European equities close behind at -2.5% and emerging markets at -1.4%. Yen strength translated to a positive GBP return for Japanese equities (+1.63%), despite weak local currency returns, and USD strength limited GBP losses in US equities to -0.4%.
Gilts and European government bonds firmed modestly over the month, both gaining +0.2% in local terms, while UK Corporate bonds fell -1.12 and US government bonds -0.7%.
GBP weakened across the board in February, falling -5.3% versus JPY, and -3% versus USD. GBP also fell -1.3% versus EUR.
Oil and gold both fell on the month in USD terms. Oil slid -5.8% lower, while Gold fell -2%.
So far 2018 has offered investors a rather bumpy ride. While we expect strong economic and profits growth to continue, 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 volatility was low, we expect more modest returns and higher volatility.
In light of our view, we remain overweight equities and underweight bonds, although we have trimmed our overweight equity position. At a regional equity level, we remain underweight UK equities. We continue to favour Europe, Japan, emerging markets and the US, trimming from the US on the belief that the economy is later on in the cycle.