Month ending 31 December
A fruitful month for equities in GBP terms. All regions gained over the month, with UK equities leading the way, up +4.91%. Emerging markets, the US and Japan delivered +4.00%, +1.15% and +0.97%. Europe was the laggard, delivery +0.39%.
In the UK, both Gilts and Corporate Bonds appreciated and were up +1.48% and +1/71% respectively. European government bonds performed poorly, down -0.79%, and US government bonds made some ground up, gaining +0.34%.
GBP depreciated against EUR and USD, down -0.89% versus EUR and -0.09% versus USD. GBP appreciated +0.02% versus JPY.
Oil and gold strengthened in the month, gaining +5.26% and +0.84% respectively.
The UK and the EU reached a breakthrough in Brexit negotiations at the eleventh hour on the settlement bill and social security rights for citizens, allowing both parties to move on to trade discussions. While inflation has tracked higher to 3.1% and weak wage growth may undermine household spending power, estimate GDP data points to a slight uptick in economic activity. The UK's composite PMI remains in expansionary territory, with support from manufacturing especially.
In the US, President Trump delivered on his promise to pass the Republican tax reform. Corporate tax rate were cut to 21%, part of the largest tax reform since President Reagan. The US composite PMI remains strong, at 54.1, and headline CPI rose to +2.2% from +2%, primarily due to the impact of higher energy prices.
The ECB kept policy rates the same and upgraded growth forecasts. In the Eurozone, 2018 GDP is now expected to grow by +2.3%, up from +1.7%. Eurozone PMIs reflected the region's recovery, with the composite figure rising to 58.1.
China data points to a sharp rebound in activity, with both services and manufacturing PMIs rising from November's figures - the Composite PI was 53, up from 51.6. Despite this pickup in activity, lower food prices allowed inflation to remain stable at 1.7%.
Japan's unemployment levels fell to the lowest in 24 years as robust economic growth led to labour shortages. Unemployment is now at 2.7%. While Japanese PMI measures continue to point to stable activity, inflation remains very subdued at 0.6%.
As we enter 2018, earnings growth remains positive and upward revisions continue. Inflation remains contained, suggesting that the benign liquidity environment may persist, and there are signs that fiscal policy will support growth, as monetary policy tightens.
However, we acknowledge the risks to this outlook. Liquidity conditions could deteriorate as developed world central banks continue to tighten monetary policy. This would be a challenging environment for bonds and may negatively impact equity markets. With this in mind, we are paying close attention tot the level of inflation and we remain cognisant of the risks. However, our view 0 that better economic data, stronger earnings and benign inflation would favour equities over bond 0 has served us well in 2017.
Looking to 2018, we still believe that shares will outperform bonds, and that stock selection and active management will continue to add substantially to returns. In the coming months we expect the synchronised global growth recovery to continue, benefiting from regional and sector depth.