May Market and Economic Update

Broad global equity indices were marginally negative through April, although notably it was a good month for Emerging Markets and in particular Chinese equities, which have now risen almost 40% year to date. US equities were once again the laggard, whereas UK equities were a relatively strong performer. Across fixed income markets, core sovereign bonds were weak, whilst high yield bonds performed well in the face of rising yields. In commodity markets, oil rallied strongly in response to evidence of peaking US production.

• Major developed market Central banks have added over US$7 trillion in liquidity since 2007, and asset prices remain dependent upon these Central bank policies. Equity market volatility post the end of QE in the US highlights the relationship between monetary stimulus and equity market performance, and expectations are now focused on the ECB’s and BoJ’s money printing programmes to sustain liquidity flows.
• With the Bank of Japan and now Europe pursuing more accommodative monetary policy whilst the US and UK are contemplating tightening, policy differentiation is likely to be the key determinant of investment returns going forward.
• Chinese stimulus may support equities but will ultimately be futile unless accompanied by real reform. The Chinese authorities continue to misallocate capital, creating a disjointed and increasingly unstable economy.
• There were no changes in the primary or secondary asset allocations from the April asset allocation committee meeting.

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