Main themes – Volatility, political tensions, trade threats, strong dollar


  • Despite trade war threats with China the US has had good growth this quarter with strong performance from the tech sector, rising earnings and an 18-year low in unemployment rates.
  • US interest rates have risen once more pushing up short term yields with the Federal Reserve increasing their inflation forecasts marginally.
  • The rising strength of the dollar has proven to be a tailwind for the US and headwind for non-US companies. The rise in value against other currencies has sparked concerns for countries with large amounts of debt denominated in dollars.
  • Political uncertainty has continued in Europe with the Italian coalition government and Brexit as focal points for much of this quarter. Overall there has been steady, but not stellar, growth from the region.
  • The FTSE All-share has had sharp rises this quarter after continued Brexit negotiations hint towards a softer approach to Brexit. A decline of sterling against the dollar has led to positive outcomes for internationally exposed companies.
  • Emerging markets have suffered from the strength of the dollar in the last quarter. This effect has been felt most heavily on countries with large amounts of dollar denominated debt and emerging market bonds.
  • Threats of trade wars has hampered performance in China but in the background there are attempts to stave off an economic slowdown for as long as possible.
  • Japan has seen an uncertain quarter with strong earnings growth but a lack of consumer confidence and retail spending.
  • Bonds yields have proven to have wide ranging performance as US yield curves flatten whereas Italian bonds have seen a significant rise. Global corporate and emerging market bonds have faltered against the rising dollar.
  • The UK property Market has been both ups and downs with gains in June and April (Total of 0.8%) beating May’s loss of 0.3% to bring the performance of 2018 so far to 0.6% although these gains have not been uniform


Following from a volatile first quarter the US has appeared to bounce back with positive economic and earnings growth partly due to corporate tax cuts introduced in late 2017. Average earnings have also increased 2.7% compared to last year along with an 18-year low in unemployment rates. This boosted activity has led to the Federal Reserve to increase policy rates, pushing up short term yields and increasing it’s 2018 growth and inflation forecasts marginally. With the tightening of monetary policy, the liquidity of the dollar has fallen which has impacted some asset types that rely heavily on dollar inflows (especially in Emerging Markets). A rise in the value of the US dollar has also provided a headwind for non-US stocks and allowing the US to gain some ground in 2018. The Tech sector has continued its strong performance along with energy and consumer discretionary goods in this quarter although the prospect of a possible trade war with China looms in the distance. Overall, the US is showing strong consumer confidence, retail sales and growth but 2018 looks to contain a lot more volatility than the previous year as the economy gradually progresses though it’s business cycle.


Although political uncertainty continues across Europe with headlines about Brexit and the Italian Parliament there has been steady growth over the past quarter. Although there has been concern over Italy’s position the coalition leaders seem to have backed away from some of the more controversial stances amid news that the coalition has begun “positive” discussions with the European Coalition regarding their 2019 budget goals. Elsewhere there has been a change of Government in Spain, clashes in Germany over immigration policy and continued Brexit negotiation however economic data shows slow but steady growth in Europe with unemployment at a 9-year low (8.5%) and wage growth currently around 1.8% per annum. The European Central Bank has announced it will be winding down its bond-buying programme around the end of 2018 and expects interest rates to remain relatively stable into min-2019. As in the US, the technology sector had a strong quarter and the energy sector has seen recent growth.


Despite recent unpopularity with investors over Brexit the FTSE All-Share index rose 9.2% over the period with strong relative performance compared to global equities. Although there is significant uncertainty over the UK’s exit from the EU there has been a movement towards a ‘soft’ Brexit in recent months. Beyond political uncertainty there has also been weak real wage growth with inflation now above the Bank of England’s target rate. The decline of sterling against the dollar over the quarter has allowed more internationally exposed companies to outperform mid-cap companies. Ongoing mergers and acquisitions have also supported returns over this time. This poor performance of the pound stems at least partly from the denial of an anticipated rate rise by the Bank of England. Following from this the Bank reduced its 2018 growth forecasts and is now expecting the UK economy to expand by 1.4% this year compared to the previous estimate of 1.8%.

Asia and Emerging Markets:

Overall Asia and the Emerging Markets have experienced a tough quarter due to various factors. The strengthening dollar has increased fears for countries with large debts denominated in dollars including Turkey and Argentina. Korean equities have also not fared well despite significant political progress between the North and South Sides although if an agreement is finalised the reduced geopolitical risk may reduce volatility but it is unclear if this will happen and how much risk it would take away from the table. Outside of this South Korea recently announced that it has dramatically cut its outlook on the job market and marginally lowering its official growth forecast for this year down from 3% to 2.9%. One of the main talking points this quarter has been rising tension between the US and China with the threat of trading tariffs. Despite this Chinese economic growth remains relatively robust although internally there are efforts to act against a potential slowdown later this year. Elsewhere in the region, Japan has had an uncertain quarter, but the equity market showed a positive total return of 1.1% this quarter. There has been strong earnings growth however a lack of consumer confidence has led to poor retail spending and consumption.


Global bonds are proving to have wide-ranging results this quarter with increased volatility. US 10-year Treasury yields experienced a significant rise in April only to be retraced later in the quarter bringing the total increase to 0.12%. The US yield curve has now started to flatten with the spread between 2 and 10-year yields at its lowest point since 2007. Italian 10-year bonds have seen a significant rise from 1.79% to 2.68% in the wake of the formation of the new coalition government and uncertainty over their future relation with the EU. Global corporate bonds and Emerging market bonds have seen poor performance this quarter with local currency bonds hit particularly hard by the rising dollar.

UK Property:

UK house prices have been turbulent with April showing a rise of 0.2% only to be lost when May heralded a 0.3% loss. A rise of 0.6% during June has now brought the overall growth in the sector for the year to date to 0.6%. Regional variation was, as usual, present with the strongest growth in Scotland and the Midlands contrasting with falls of 2.6% in London. Alongside this fall there has been a decrease in property transactions over this quarter. For example, prices in the Midlands are rising but the number of transactions has fallen 1.4% since April. At odds with this there has been an increase in properties entering the market and in new buy Enquires. It is expected that an upcoming increase in the Bank of England’s base rate will increase pressure on mortgage interest rates which have already begun to rise over recent months. Outside of the residential market the construction sector has had its weakest quarter since 2012 but there has been an increased amount of growth in both retail sales and employment.


IFA Jenny Hall, DipPFS