April 07, 2017

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Quarterly markets review - Q1 2017

Global equities delivered robust gains in the first quarter amid an upswing in global economic data. Emerging market equities were particularly strong while bond markets saw more mixed performance.
US equities advanced to fresh all-time highs, supported by positive economic data and President Trump’s plans to cut taxes and regulations. The Federal Reserve raised rates by a further 0.25%.
Eurozone equities delivered robust gains amid upbeat economic releases and receding political worries following the win for the centre-right in the Dutch elections.
UK equities gained, supported by solid corporate results and merger & acquisition activity. Article 50 was triggered at the end of the period, signalling the formal start of the process to leave the EU.
Japanese stocks saw positive but muted returns with the yen gradually appreciating over the quarter.
Emerging markets registered a robust return. An upturn in global growth and a lack of follow-through on protectionist trade policy from the Trump administration supported risk appetite.
In bond markets, high yield corporate bonds performed particularly well, while government bonds were more mixed.

http://hvst.co/2o7wJXq

Issued in

April

2017

Schroders

Quarter

markets review

Overview of markets in

1 2017

Highlights:

–

Global equities delivered robust gains in the first quarter

amid an upswing in global economic data.

merging market

equities were particularly strong while b

ond markets saw more mixed performance.

–

US equities

advanced

to fresh all

time highs, supported by positive economic data and President Trump’s

plans to cut taxes and regulations. The Federal Reserve

raised rates by a further 0.25%.

–

Eurozone equities

delivered robust gains amid

upbeat

economic

releases

and receding political worries

following the win for the centre

right in the Dutch elections.

–

UK equities

gained, supported by solid corporate

results and merger

& acquisition activity. Article 50 was

triggered at the end of the period, signalling the formal start of the process to leave the EU.

–

Japanese stocks

saw positive but muted returns with the yen gradually appreciating over the quarter.

–

Emerging markets registered a robust return. An up

turn

in global growth and a lack of follow

through on

protectionist trade policy from the Trump administration supported risk appetite.

–

In bond markets, high yield corporate bonds performed particularly w

ell, while government bonds were

more mixed.

US equities performed well as the S&P 500 advanced 6.1%.

Macro

economic data continued to be supportive.

Non

farm payrolls

were robust and activity indicators buoyant

. These included

the Institute for Suppl

Management’s manufacturing

purchasing managers’ index (

PMI

)

and the

Conference Board consumer

confidence i

ndex

–

the latter rose to 125.6 in March, the highest level in more than 16 years.

Reflecting the improving outlook for growth and inflation the Fe

deral Reserve

(Fed)

raised base rates by

0.25% at the March meeting of its Federal Open Market Committee. The market remained optimistic over

Donald Trump’s plans to cut taxes, boost infrastructure spend and reduce the regulatory burden on business.

Howeve

r, the failure at the period end to pass revisions to healthcare legislation did plant doubts about the

administration’s ability to implement some of its policies.

Information technology was the top

performing sector, followed by consumer discretionary an

d healthcare.

The energy sector lagged the market, inline with the decline in crude oil prices. In a reversal of the

performance patterns in the fourth quarter of 2016, small and mid

cap equities trailed large caps, with the

Russell 2000 and Russell 2500 r

ecording respective gains of 2.5% and 3.8% over the period.

Eurozone

European equities were strong in Q1 with the MSCI EMU index returning 7.2%. The period started on a weak

note, with negative returns in January, but stockmarkets picked up as the quarter progressed. Economic data

released during the period was largely posi

tive. Leading indicators showed gains with the flash composite

purchasing managers’ index reaching a near six

year high of 56.7 in March. Inflation, as measured by the

consumer price index, picked up to 2.0% in February, albeit slipping back to 1.5% in Mar

ch.

Non

farm payrolls are a means of measuring employment in the US and represent the total number of people employed, excluding farm

workers, private household employees and those employed by non

ofit organisations.

Schroders

Quarter

markets review

Issued in

April

2017

The

ECB

upgraded its 2017 and 2018 growth and inflation forecasts but pledged to keep existing stimulus in

place until the end of the year.

Political worries receded as the centre

right won the Dutch elections in March, fending off the challenge fr

the anti

EU party led by Geert Wilders. Meanwhile, opinion polls suggested that the odds of a Marine Le Pen

win in the French presidential election are low and diminishing.

The information technology sector was the top performer, followed by utilities

and industrials. Energy was the

only sector to register a negative return.

The quarterly earnings season was a positive one for European

equities, with many firms reporting double digit earnings growth and confident outlooks for 2017.

The FTSE All

Shar

e index rose 4.0% amid further evidence of a recovery in the global economy. The UK

domestic economy also proved more resilient than expected

. T

he Bank of England upgraded its 2017 UK

GDP growth projection (from 1.4% to 2.0%) due to stronger

than

expected

con

sumer spending following the

“leave” decision

in the EU referendum

Many cyclical

sectors continued to outperform, building on their very strong performances at the end of 2016.

However, the so

called “reflation trade”

lost some momentum as Presiden

t Trump failed to pass revisions to

healthcare legislation.

Mergers & acquisitions (M&A) were

an important theme: British American Tobacco agreed to acquire the

outstanding stake in Reynolds American it does not already own

;

Unilever received a bid from US peer Kraft

Heinz

;

and Reckitt Benckiser agreed to acquire American

baby

milk manufacturer Mead. Domestic M&A also

picked up, such as Standard Life’s deal to acquire Aberdeen Asset Management.

Sterling strengthened over the

period against a weaker US dollar. Prime Minister Theresa May suggested the

UK was heading towards a harder variant of Brexit as she set out the government’s negotiating priorities in her

Lancaster House speech in January. She triggered Article 50 in Marc

h to begin the two

year exit process.

Japan

The Japanese stockmarket traded in a tight range throughout the quarter, registering a total return of just

0.6%. After weakening sharply at the end of 2016, the Japanese yen appreciated gradually in the past t

hree

months. From Japan’s perspective, the main political event was the meeting in February between Prime

Minister Abe and President Trump in Washington and Florida. The meeting appeared to be surprisingly cordial

despite the previous US rhetoric around tr

ade imbalances and Japan’s foreign exchange policy.

A decision taken by the ruling Liberal Democratic party in early March has enabled Mr Abe to continue as the

party’s leader for another term, if he wishes.

However,

recent

Mr Abe has faced the first s

ignificant political

scandal of his current tenure. This stemmed from the sale of public land in Osaka which was destined to be

used as a kindergarten by an extreme

nationalist educational organisation. This issue has led to the first

significant dent in M

r Abe’s public approval rating.

Meanwhile, the corporate results period for the quarter to December concluded in mid

February. Overall, the

results were very solid with over 60% of companies reporting positive surprises compared to the consensus.

Earnings

revisions have been strongly positive in the early part of the year and, although profit trends remain

favourable, forecasts now include much of the positive impact of the yen weakness seen in the second half of

2016.

Across the quarter, the stockmarket

was led by cyclical sectors such as marine transportation, paper stocks

and chemical companies as investors continued to discount the possibility of stronger global growth. Financial

related sectors, including banks and leasing companies, lagged the market

although all of their

Cyclical stocks are those whose business performance and share prices are directly related to the economic or business cycle.

Defensive

are those

whose business performance is

not highly correlated with the larger economic cycle

hese companies are

often

seen as good investments when the economy sours.

Reflation is a fiscal or monetary policy designed to expand a country's output and curb the effects of deflation.

Schroders

Quarter

markets review

Issued in

April

2017

underperformance accrued in a relatively brief period in March. Real estate stocks have shown a more

consistent pattern of underperformance and were the weakest sector in the quarter.

Asia (ex Japan)

Asia ex Japan equities rebounde

d strongly from the last quarter of 2016 to post strong positive returns in the

first quarter of the new year, spurred on by the broader “Trump bump” rally seen in global stockmarkets. In

China, stocks gained strongly and had their best first quarter in ov

er 10 years, driven on by continued positive

news for the world’s second

largest economy. Better

than

expected data and a

stabilizing

Chinese yuan led to

improved sentiment among investors. Ongoing restrictions on the property market and a tightening on ca

pital

outflows also saw liquidity diverted into equities.

In nearby Hong Kong, stocks tracked China markets higher on investor optimism as well as strong buying

interest from Mainland Chinese investors via the Southbound Stock Connect scheme. Over the st

rait in

Taiwan, stocks hit a near two

year high as foreign investors returned to the market while Korean equities also

advanced strongly on the back of its technology sector.

In ASEAN, Indonesian, Thai and Philippine stocks all gained although the

Philippines was the regional

underperformer as concerns lingered over the weakness of its currency and the erratic policymaking of

President Duterte. Meanwhile, Indian stocks led gains in Asia as its market finished strongly up on the back of

investor opti

mism surrounding Prime Minister Modi’s reform agenda following a resounding victory for his party

(the BJP) in state elections in March.

Emerging markets

The MSCI Emerging Markets index posted a strong gain, with US dollar weakness providing a tailwind

returns. An upswing in global growth and a lack of follow

through on protectionist trade policy from the Trump

administration supported risk appetite.

Korea, Mexico, Taiwan and China all benefited from these factors and outperformed. In China, the wea

ker US

dollar also served to alleviate concerns over capital outflows while economic data stabilised. Indian equities

rallied as GDP growth appeared to shrug off demonetisation concerns. The ruling BJP also performed well in

state elections, reflecting sup

port for ongoing reforms. Poland was the strongest index market as positive

economic data increased expectations for growth this year.

By contrast, Russia posted a negative return and was the weakest index market. A decline in energy prices

and reduced

optimism towards a significant improvement in relations with the West were the key headwinds.

Greece also recorded a negative return with banking stocks leading the market lower.

Global bonds

Optimism over the strengthening global economy and potential p

growth effects from President Trump’s

fiscal stimulus plans continued to drive markets in Q1. Data showed real economic activity continuing to pick

with

yet further evidence of synchronised global reflation underway. The shift toward monetary policy

normalisation also continued. The Fed raised rates and the

ECB

signalled it sees less need for

accommodative policy going forward. Detail over Trump’s fiscal plans remained generally thin, but significant

doubts about his ability to implement reform were p

lanted in March after a failure to pass healthcare

legislation. Politics in Europe remained a worry for markets as nationalist politicians continued to command

support

, although concerns receded somewhat towards the end of the period

Against the backdro

p of strengthening growth, rising inflation and marginally more hawkish central banks,

global credit, particularly high yield

, outperformed government bonds. Global high yield credit outperformed

government bonds by 2.4% on an absolute return of 2.8%. UK

high yield proved particularly strong with a

return of 3.3% and outperformance of 2.8% above government bonds. Global investment grade corporate

bonds rose 1.2% outperforming government bonds by 0.7%.

Investment grade bonds are the highest quality bonds as dete

rmined by a credit ratings agency. High yield bonds are more speculative,

with a credit rating below investment grade.

Schroders

Quarter

markets review

Issued in

April

2017

Among government bonds, Europeans sovereigns came und

er pressure amid political concerns and markets

starting to adjust to the prospect of monetary stimulus withdrawal. Spreads on French and Italian bonds over

Bunds widened markedly reflecting political risk. French 10

year yields rose from 0.67% to 0.97% an

d Italian

year yields from 1.81% to 2.31%. Ten

year Bund yields rose from 0.21% to 0.33%. US and UK government

bonds performed better. The US 10

year yield came in from 2.44% to 2.39% and the UK’s from 1.24% to

1.14%.

Global equity markets continued wi

th positive momentum into 2017.

Global convertible bonds benefi

ted from

this rally with the Thomson Reuters Global Focus convertible bond index finishing

with a strong 2.83%

return

in US

dollar

terms.

Buoyant equity markets have moved the overall equity

exposure of convertible

bonds upwards. Above

average issuance, especia

lly from

US companies, meant a stable supply of balanced

bonds. For the first quarter

illio

n of new convertibles came to the market

indicating a good chance

growing convertible bond universe in 2017. Also, global convertible funds are seeing positive flows again, after

bigger outflows

from

the asset class during 2016. On balance, our models signal that a large part of the global

convertible market remains fa

irly valued, albeit bargains

have

become more difficult to find.

Commodities

The Bloomberg Commodities index lost ground in Q1, largely due to a decline in the energy component. Brent

crude fell

7% as oil inventories and production in the US increased at

a faster rate than expected. Natural gas

was down

14.3% and coal declined

8.7%. The agriculture component was also weaker, largely attributable to

weakness from sugar and soybeans prices. By contrast, industrial metals generated a positive return. Iron o

rallied 5.7% while copper (+5.8%) and zinc (+7.5%) also rose on higher demand from China. Precious metals

finished in positive territory, with gold (+8.3%) and silver (+14.2%) both posting gains.

Schroders

Quarter

markets review

Issued in

April

2017

Overview: total returns (%)

–

to end of

201

month

12 months

Equities

EUR

USD

GBP

EUR

USD

GBP

MSCI World

5.06

6.53

5.27

23.00

15.44

32.68

MSCI World Value

2.99

4.43

3.20

25.70

7.97

MSCI World Growth

7.25

8.75

7.46

20.33

12.93

9.81

MSCI World Smaller Companies

3.91

5.36

4.11

26.13

8.37

36.06

MSCI Emerging Markets

9.95

11.49

10.17

25.36

7.65

5.23

MSCI AC Asia ex Japan

11.84

13.41

12.06

25.53

17.82

35.42

S&P500

4.60

6.07

4.81

24.85

17.17

34.68

MSCI EMU

7.22

8.72

7.43

20.80

13.38

30.32

FTSE Europe ex UK

7.24

8.74

7.45

18.54

11.26

27.88

FTSE All

3.82

5.27

4.02

13.05

6.10

21.95

TOPIX*

3.81

5.27

4.02

23.26

15.68

32.97

month

12 months

Government bonds

EUR

USD

GBP

EUR

USD

GBP

JPM GBI US All Mats

0.68

0.71

0.48

1.51

13.21

JPM GBI UK All Mats

1.41

2.83

1.61

0.93

6.87

JPM GBI Japan All Mats**

2.72

4.16

2.93

5.92

0.59

14.26

JPM GBI Germany All Mats

0.77

0.61

0.58

0.63

6.74

7.20

Corporate bonds

EUR

USD

GBP

EUR

USD

GBP

BofA ML Global Broad

Market Corporate

0.29

1.70

0.5

7.90

.27

16.40

BofA ML US Corporate Master

0.02

1.42

0.22

10.18

3.41

18.86

BofA ML EMU Corporate ex T1 (5

10Y)

0.41

1.82

0.61

3.24

3.10

11.38

BofA ML £ Non

Gilts

1.62

3.04

1.82

1.33

4.89

9.32

Non

investment grade bonds

EUR

USD

GBP

EUR

USD

GBP

BofA ML Global High Yield

1.65

3.07

1.85

21.27

3.82

0.83

BofA ML Euro High Yield

1.68

3.11

1.89

8.99

2.29

17.58

Source: DataStream. Local currency returns in

201

0.57

0.49

Past

performance is not a guide to future performance and may not be repeated.

Important Information:

The views and opinions contained herein are those of Keith Wade, Chief Economist and Strategist, Azad Zangana, European

Economist and Craig Botham, Emerging Markets Economist, and do not necessarily represent Schroder Investment

Management North America In

c.’s house view.

This newsletter is intended to be for information purposes only and it is not intended as

promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any

financial

instrument me

ntioned in this commentary. The material is not intended to provide, and should not be relied on for accounting, legal or tax

advice, or investment recommendations. Information herein has been obtained from sources we believe to be reliable but Schrod

vestment Management North America Inc. (SIMNA) does not warrant its completeness or accuracy. No responsibility can be accept

for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document w

hen

taking

individual investment and / or strategic decisions. Past performance is no guarantee of future results. Sectors/regions menti

oned are for

illustrative purposes only and should not be viewed as a recommendation to buy/sell. The information and opini

ons contained in this

document have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of fact obt

ained from

third parties. Schroders has expressed its own views and opinions in this document and these may c

hange. The opinions stated in this

document include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions

within

the bounds of what we currently know. However, there is no guarantee that any forecasts

or opinions will be realized.

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