Investment Commentary – February 2017

Economic Commentary

The bull run in equities that began seven years ago shows no signs of abating, with both UK and US markets reaching record highs in February.

The FTSE All-Share rose 3.1% while US equities were up 5.1%. The laggards were European and Japanese markets, but their returns (+1.9% and +2.2% respectively) were still impressive. Emerging markets also rallied (4.4%), although there was considerable dispersion at the country level.

What is driving markets higher? As ever, it is a combination of factors. Investors have focused on forward-looking surveys, such as the Purchasing Managers’ Indices (PMI) in the US and Europe. The PMIs are showing strong manufacturing activity, and continue to be backed up by good earnings from US corporates.

It is also worth noting how low volatility is in the markets right now. In the first two months of 2017, the S&P 500 has not had a single day where it has closed up or down 1%—the quietest start to a year since 1966.

With such strong equity returns, it is a little surprising that the returns of the bond market have been so strong. UK government bonds returned 3.2% and global government bonds 1.6%, signalling continued demand for safe-haven assets.

Uncertain election outcomes in France, Netherlands and Germany this year is one reason investors have been willing to invest in debt with negative yields.

Finally, US Federal Reserve chair Janet Yellen’s testimony to congress in the month provided a strong signal that the US central bank is ready to hike up interest rates. By month end, the market probability of a March interest rate hike had risen to 80% and is a 94% chance at the time of writing.

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