IFM Investors Economic Update

As we approach the mid-point of 2018, it seems appropriate to look back to see how markets have performed so far this year, and why. Much of the repricing of US equity and bond markets took place in the first month of the year. This was prompted by investors seeing returns upside, with the prospect of better economic outcomes being underpinned by front-loaded fiscal stimulus from the US government. This was true of government spending and household and corporate tax cuts – the latter having a direct earnings impact for US corporates. The fiscal stimulus also drove an increase in bond yields, as GDP and inflation forecasts were revised higher, and with them expectations of a more aggressive tightening cycle by the Federal Reserve (Fed). Yet ironically there was too much of a good thing and the repricing in bond markets seemingly sparked a selloff in equities as valuations came under pressure. This saw equites more than relinquish January’s gains and, despite a recovery through February, they have largely range traded through subsequent months.

Chart 1: Global - Major asset class returns 2018 YTD
Increased volatility and lower returns pervade key listed markets


Source: IFM Investors, Bloomberg

Further consistent gains since February have seemingly been capped by two key factors. The first is that the upside surprise from global economies has not been getting materially better, nor is it expected to – most of the economic ‘good news’ has been priced in. This is particularly true of economies outside of the US, where higher frequency data is showing signs of having peaked.

US data flow remains solid and is adding some buoyancy to markets, but this is interspersed with a second factor – heightened geopolitical risks. Markets have lurched due to rising and falling tensions around key global issues, including North Korea-US relations, US-China “trade wars”, US-Iran/Middle East/Oil, Brexit, and Italian politics to name a few. These factors have defined much of the price action in equity markets. They have also capped the rise in US bond yields, via safe haven flows, as the prospect of stronger inflation and a more aggressive Fed pushed 10-year treasuries temporarily above 3%, with investors seemingly considering at what levels of bond yields it is appropriate and/or prudent to take some risk off the table.