UK investors might think it appropriate the first quarter of 2018 ended with a disappointingly damp Easter bank holiday weekend.
A quarter that started with so much optimism has ended with global markets in negative territory. The party was brought to an end by concerns that an overheating economy would push inflation and, in its wake, interest rates higher and more quickly than anticipated. After the euphoria and overconfidence dissipated, bouts of market volatility were triggered by the sort of concerns investors had previously felt comfortable dismissing.
That said, the rapid recovery from the recent dips tells us stockmarkets still have legs. From our perspective, this makes a lot of sense, given global growth rates remain healthy, just not worryingly frothy.
Overshooting economic growth momentum no longer poses a particular threat, but growth remains strong enough to expect gradually rising interest rates and bond yields. This in turn should prevent valuations from running away, as the competition of fixed interest bond yields returns. The continuation of economic growth and the generally positive outlook (despite the occasional political blowout) for the global economy leads us to believe that, over the medium term, returns will be back in positive territory for 2018.
Yet over the shorter term, volatility will continue to reign. While unpleasant, it is a helpful mechanism to purge unhealthy market developments and help capital markets gradually adjust to changing circumstances.
The challenge of the coming quarter will be to foresee market reaction to the changing but broadly normalising environment, as well as the timing of those reactions. Macroeconomic data over the coming weeks will be as important as the Q1 corporate earnings reports, which start to come out towards the end of April. Unfortunately, there are a number of additional factors, which will make it difficult to make short-term high conviction investment calls one way or the other.
