Monthly Market Outlook: February 2018

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Global equity markets were positive again, registering a 5.3% performance in January, benefiting from the positive sentiment and the passing of the US tax reform at the end of 2017. The macroeconomic environment was less supportive, however, as some key indicators suggested that global economic momentum was slowing down in January. The US Federal Reserve has had its last meeting under Janet Yellen, with the FOMC suggesting more vigilance for inflation under revised scenarios implying faster growth. Valuations remained expensive, but not onerous, with the MSCI world trading at 17x forward earnings. For UK investors, the upward trajectory of the Pound, which gained 5% against a tumbling US Dollar and 1.5% against the Euro, affected positions in global equities. UK stocks, inversely correlated to the Pound, lost 2% for the month, and are now trading at 14.4x earnings, significantly below their global peers. In Sterling terms, US equities gained 0.8% (5.7% locally), European stocks gained 0.9% (2% locally), EM stocks gained 3.3% (8.3% in USD) and Japanese stocks lost -0.8%, (up 1.1% in Yen). Global bond markets also saw significant movements when the US 10 year Treasury yield broke the 2.55% barrier, ending the month at 2.69%. The move pulled long end yields for other developed market bonds with it, where yield curves also steepened significantly. Oil prices continued to rise, up 7.1% for the month, after Russia and OPEC renewed their deal for significant production cuts into 2019.

In the last days of January and the first week of February, however, equity markets experienced a return of volatility not seen since 2016, as investors realised that higher growth means higher prospects for inflation and therefore possibly 3 to 4 US interest rate hikes, compared to the 2 the market was anticipating on average.