After a positive couple of years for markets, the opening to 2018 proved to be a period of highs and lows. We saw stock markets in the UK and US post record highs; but at other times, the worst volatility in seven years. Although markets settled over spring, the spectre of global trade wars escalating means there is still uncertainty.
The year began with a bang – as global markets witnessed their best start to the year in over three decades. But then in February, a market correction occurred, where US stock markets fell by 10%; caused by several factors including, fears of rising inflation and interest rates. The volatility spread around the world, with emerging markets and Europe feeling the effects.
Most markets managed to recover reasonably well over quarter two. On the whole, shares were the best-performing asset class – helped by the rising US Dollar against a weakened Sterling. This boosted the level of returns for investors with global holdings.
The US particularly prospered, supported by a rise in oil and strong economic data (unemployment plunged to 3.8% – its lowest level in almost 50 years). A continuation of strong performance from technology stocks also played a key role. In fact, technology was the best-performing sector by some margin – with several major companies achieving double-digit gains in May. Over the last two years especially, the technology sector has been one of the best-performing sectors.
Closer to home, UK shares experienced a slightly mixed quarter. But overall they performed well – bouncing back from a difficult start to the year.
Uncertainty over Brexit and a weak Sterling has hampered overall performance, however.
Emerging markets in particular weighed down by threat of trade wars
It’s been a strong couple of years for emerging markets, but the first half of 2018 saw a reversal of fortunes. Donald Trump’s ‘America First’ mantra hasn’t helped, with the US President pushing for trade tariffs and sanctions on countries like China, impacting on companies who export goods and services to the US.
In June, Trump used the G7 summit of major world leaders to argue for tariffs against ally countries like Canada and across Europe; but emerging markets – which particularly benefit from globalisation of trade – are impacted to a greater level. And that’s why the White House rhetoric has significantly affected investor sentiment towards countries like China and India. A strong US Dollar has also hurt emerging markets.
For markets, trade wars can bring huge uncertainty. Tariffs would lead to higher prices on imported goods and services for consumers. For example, in the US it could become more expensive to buy a German car. This is likely to impact company profit margins.
Certain companies and industries are likely to be more impacted by tariffs than others, especially larger companies, who more typically rely on global suppliers and sell their products and services in multiple countries. Historically, markets and currencies have reacted badly to trade tariffs.
Scott Ashworth, Technical Research Manager
The Trump administration has continually proven unpredictable, and may yet change tact on their strong tariff talk. What we don’t know for sure is whether the trade tariff threats are a White House negotiating tactic when the real aim is to achieve a compromise, or the desired outcome.
Moving into the second half of 2018 and beyond, the level of trade sanctions that are implemented – and the trade retaliation from the likes of China and the European Union – is likely to remain a major story. It really hurt emerging markets in June, but other regions may not be immune from the effects of a trade war. And that includes the US.
Mixed fortunes for fixed income
It wasn’t just shares which endured a challenging six months. Another asset class that your fund may be invested into – fixed income – experienced a period of ups and downs.
The outlook for fixed income has been affected by the spectre of interest rate rises and trade tariff speculation. The implementation of tariffs could cause inflation to rise, due to more expensive consumer prices, which could hurt fixed income holdings. The related issues within emerging markets have also had a negative impact.
Broadly, yields have gone up, which means the value of affected fixed income assets has fallen. For example, within US government treasury bonds, yields have been steadily rising on 2-year bonds since September – largely due to US interest rate rises. Yields on longer-dated US treasury bonds – such as 10 and 30-year bonds – have been more up and down, but haven’t significantly altered over this period as a whole.
Jerome Powell, the chair of the US Federal Reserve, stated it's not a surprise this trend has happened since interest rates started to rise.
Some experts argue these yield rises are a sign that markets are becoming more cautious about the economic outlook.
Mark Elliott, Head of Financial Advice Research and Risk, reflects, “It was a difficult start to the year. Although the February fall wasn’t a drastic tumble for markets – it was merely a correction, and one that has been long overdue.
“April to June proved to be a better period for investors – particularly those with global or UK holdings. That said, emerging markets struggled over this first half of the year – hindering funds with exposure to these regions.
“Looking ahead, the impact on markets from trade wars - should these tensions continue - will play a crucial role over the second half of the year. This is something fund managers will be focusing on as part of their long-term investment strategy.”