ETF portfolios EUR – Q1 2019 commentary

Asset classes
Equities, fixed Income, non-traditional
InstrumentsETFs
Investment styleMacro strategic and diversified exposure
Quarterly return (net of fees) 
Defensive+4.9%
Moderate+8.1%
Aggressive 
+10.1%

Market overview

Markets closed the first quarter of 2019 with a global stock and credit (bond) assets rally. The strong positive performance in 2019 is a reversal of late 2018’s market angst, which was largely caused by perceptions of an overly hawkish Fed policy and Chinese economic slowdown. This rally may have been fueled by an uptick in market sentiment following recent US-China trade negotiations and the subsequent reduction in perceived geopolitical risk. A generally more dovish monetary policy in the US, Europe and Japan has also provided support. Consensus for US Treasury has swung from expecting multiple rate hikes to a more dovish tone.

The US stock market increased significantly with the S&P 500 returning 13.6%, largely due to easing geopolitical tensions and dovish Fed policy. European stock markets also increased (MSCI Europe excluding UK: 12.6%), and so did the UK FTSE 100 by 9.5%. The strong performance in European stocks may be attributed to heightened market sentiment caused by reduction in geo-political risk due to the extension of the Brexit deadline. Additionally, emerging market equity increased (MSCI EM: 9.9%) likely due to the Chinese government’s recent fiscal and monetary policies that implemented new tax cuts, infrastructure investments and other measures designed to support bank credit growth.

On the fixed income side, the risk-on sentiment in Q1 this year has led to strong performance of fixed income assets, particularly the riskier categories: US High yield returned 7.4%, EM debt 6.6%, and Euro high yield 5.3%. Global investment grade credit followed closely with 4.2%. Finally, the more dovish tone of monetary policy across the developed markets has also led to a rally in sovereign debt. Euro treasuries as well as US treasuries both returned more than 2% in the first quarter.

 

Portfolio performance

Returns net of feesDefensiveModerateAggressive
Jan +2.5% +4.5%+5.5%
Feb
 +0.9% +1.8% +2.4%
Mar  +1.5% +1.7% +1.8%
1 Year    
Since Inception (August 2015)  +8.5% +19.9% +28.3%

(Performance is net of all fees) 

Portfolio performance across all risk profiles was positive this quarter. Allocations across equity, fixed income and nontraditional asset have all contributed positively.

Performance was predominantly driven by allocations to equities, led by the US and closely followed by EU and emerging market. On the fixed income side, US treasuries and mortgage-backed securities also contributed considerably to this overall positive result.

Outlook

In Q2, BlackRock sees a narrow path ahead for risk assets to move higher. Yet rising risks could knock markets off track. This calls for carefully balancing risk and reward in portfolios. 

The Federal Reserve has pledged to be patient on its next rate move and other central banks are indicating policy will remain loose for longer. Combined with a slowing, but still growing, global economy and a perceived reduction in geopolitical risks, BlackRock sees this providing a positive near-term backdrop for risk assets. The risks to this include a resurgence of recession fears; inflation pressures that force the Fed to resume tightening; or a geopolitical shock — such as a US-Europe trade showdown — that saps risk appetite.

Chinese policymakers are easing fiscal and monetary policy. We expect this stimulus to lead to a bottoming out of the economy from the second quarter. This should feed through to global capital expenditure (capex) spending and provide a welcome temporary respite from late-cycle worries about slowing global growth. BlackRock sees potential for a US-China trade deal to address the bilateral trade gap and market access but cautions that US-China tensions, particularly over tech dominance, are likely here to stay.  

BlackRock remains risk-on in markets yet acknowledges the recent rally across markets looks fragile and hard to replicate, and believes expectations of Fed policy have become too dovish. This warrants selective risk-taking. BlackRock’s preferred grounds for equity investing remains the US and emerging markets, favouring quality equities in sectors that can sustain earnings growth in a slowing economy, such as selected health care and tech firms. In bonds, the focus is on income, like US Treasuries, as portfolio shock absorbers.

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