Continued macro uncertainty
2017 has seen a continuation of many of the themes that have defined recent years. Political instability, low interest rates and high market valuations have again driven headlines across the world.
While political uncertainty did not diminish in 2017, there was a slowdown in the wave of populism that had dominated the previous year. General elections in France and the Netherlands were won by the more centrist parties, despite populist movements. However, we witnessed independence campaigns in Spain, increasing far-right politics in Austria and a German general election that left the incumbent party initially struggling to form a coalition government.
In our home market of the UK, a snap general election failed to deliver a majority government to any political party. The UK’s planned exit from the European Union has continued to dominate the political agenda and a great deal of uncertainty remains.
In the US, the administration struggled to push through key legislation, although succeeded in passing a tax reform bill that will reduce the headline corporate tax rate. In Asia Pacific, escalating tensions on the Korean peninsula threatened to destabilise the region.
Interest rates globally remain at historically low levels, although we have seen some central banks take steps towards normalising monetary policy. The Federal Reserve has enacted three interest rate increases through 2017 and the Bank of England raised rates for the first time in a decade. The European Central Bank maintained its Quantitative Easing policy, but tapered purchases throughout the year and is expected to continue to do so in 2018.
Regulation continues to be a key focus for the industry. In June, the UK’s Financial Conduct Authority (FCA) published the final report of its Asset Management Market Study and announced a series of measures to improve competition within the industry. In Europe, MiFID II and PRIIPs dominated regulatory discussions. Both were implemented at the start of 2018 and aim to provide greater investor protection and improve transparency.
A good year for risk assets
Despite these macro concerns, our clients have benefited from a benign environment through 2017, with global equity markets advancing against a backdrop of positive economic data. Global growth rates have continued to improve, albeit in many cases these were not matched by wage growth. Inflation rates in most developed economies remain relatively low and employment data has generally been strong.
Within global equity markets, all of the major indices provided positive returns for the year. Emerging markets led the way with a near 40% return in US dollar terms. European and US indices also performed well, although the latter fell behind when taking the depreciation of the US dollar into account.
The positive environment for risk assets was also beneficial for credit strategies, with both global high yield and investment grade indices providing strong positive returns.
Although equity markets were largely unaffected by macro and geopolitical concerns, this was not generally the same in fixed income markets, particularly in government debt. As European political risk grew at the start of the year, yields rose in French and Italian government bonds ahead of elections. However, both ended the year positively as political concerns subsided.
There was some volatility within major currencies at the beginning of the year but trends became clear through the second quarter. The US dollar weakened against most major currencies throughout the second half, when measured using effective exchange rates, while the euro strengthened. Sterling fluctuated throughout 2017 but ended the year having strengthened slightly due to some positive progress in Brexit negotiations.
