Balanced Portfolios Q2 2017 Commentary
Global equity markets were broadly positive for the second quarter of 2017 (Q2), with particularly strong returns posted by emerging markets and Japan. Europe and the UK closed the quarter on a weaker note, but were still positive for the quarter.
Political concerns dominated headlines in the early part of the quarter, even if the market impact was more muted. The French election concluded rather quietly with Macron easily beating Le Pen. In the US, President Trump’s decision to fire FBI Director James Comey resulted in one of the sharpest selloffs of the year. That said, stocks recovered virtually immediately, although the Russia investigation is far from any conclusion.
Three of the largest central banks all took pains to set market expectations for policy tightening. The Fed enacted another rate hike, and is also expected to announce a balance sheet reduction policy later this year. The Bank of England is at least talking of raising rates. In perhaps the biggest surprise event of the quarter, ECB rhetoric definitively took a more hawkish turn. Although US and Eurozone inflation remains weak, Janet Yellen and Mario Draghi have maintained that the current soft readings on inflation are due to transitory effects, which in their view will dissipate without the aid of more supportive monetary policy.
International developed equities outpaced the US for the quarter, despite weakness in June that characterised European and UK equities. Emerging market equities – the strongest region of 2017 - delivered very solid returns for the quarter.
Global fixed income was broadly positive. Consistent with the risk-on environment, investment grade and high yield corporates were the strongest performers. That said, even in the government bond space, US and European treasuries delivered modest gains.
Commodities suffered broadly, with weakness in crude oil leading the way down. Although structural shifts in supply and demand may be keeping a lid on crude prices, gold was also weak for the quarter, despite increased geopolitical tensions and a very weak US dollar.
Performance was negative for the second quarter of 2017 for each of the risk profiles, whilst the year-to-date returns are positive. Over the quarter US and Pacific ex Japan equites particularly detracted from the overall returns, subsequent to their currency exposure. Positive contributors were European (Minimum Volatility ETF), Japanese and US equities in EUR hedged.
For the Conservative and Moderate profiles, German government bonds were the detractors within fixed income component of the portfolios. For the aggressive profile, performance from the fixed income component was flat.
Across all profiles the exposure to diversified commodities was a detractor throughout the quarter, and also the overall EUR/USD appreciation was a headwind to the portfolios.