April 2017 Monthly Market Review

Global equity markets continued to rally and exhibit low volatility in April despite an uncertain political environment and a lackluster U.S. GDP report.  While there were gains in several areas, there were further signs of market divergence across markets during the month.  Emerging markets and non-U.S. developed market equity outperformed the S&P 500 Index, widening the year-to-date differential of returns for non-U.S. markets above domestic equities.  There was also notable currency divergence, with currency serving as a tailwind, in aggregate, for developed market investments.  The price of oil fell during the month largely on concerns that increased U.S. crude production could offset OPEC production cuts.  While oil prices remained well above 2015 and early-2016 levels, the recent weakness impacted multiple markets and commodity-sensitive currencies.

Global equities were led by markets outside the U.S. and Canada, with the MSCI EAFE Index gaining 2.5% (+1.4% in local terms) and the MSCI Emerging Markets (EM) Index up 2.2% (+2.3% local).  The S&P 500 gained 1.0% as first quarter trends spilled over into April.  In the U.S. growth stocks continued to outperform value, buoyed by the strength of the IT sector, which rose 2.5% and was the best performing sector of the index.  After falling in the first quarter, telecom fell 3.3% in April due to increased competitive pressures, while energy dropped 2.9% because of a downtick in oil and natural gas prices.  Europe was a leader during the month as Emmanuel Macron’s first round victory in the French election reduced some anxiety.  Despite political concerns, European stocks, as measured by the MSCI Europe Index, have rallied 8.2% for the year-to-date period amid some improvement in macroeconomic sentiment for the region.  Developed non-U.S. markets exhibited strength in April, as Canada (−2.1%) and Australia (−0.7%) were the only countries to post negative results.  Both countries were negatively impacted by falling commodity prices, with Canada also hurt by a drop in bank stocks amid fallout from a run on deposits at Canadian mortgage lender Home Capital Group. 

Emerging markets equity also outperformed other regions despite geopolitical issues in North Korea, Turkey, and South Africa.  Select emerging European countries posted strong returns, helped by the results of the first round of French elections.  More commodity centric countries, such as Russia and Brazil, delivered negative returns in the month.  Among the top performers were Poland, Greece, and Turkey, each delivering a return of more than 11% in USD.  Regarding valuation, while the price/earnings ratios are above recent averages on both a trailing and forward-looking basis, they remain below the peaks of 2008 and 2010.  EM equity valuations also continue to be low relative to the U.S. and non-U.S. developed markets.

Marketable real assets performed poorly across several categories, most notably commodities (−4.1%) and natural resource equities (−3.6%).  Within commodities, the agriculture subsector declined the most (−6.9%), with excess supply and expectations of continued elevated production levels weighing on the prices of many food commodities.  Energy commodities also declined, with crude prices retreating 2.5% on growing concern that the ramp-up in U.S. crude production will offset the impact of recent production cuts by Organization of the Petroleum Exporting Countries, potentially delaying a rebalancing of global supply and demand.  Teamed with a pullback in metals prices (−4.4%), these declines flowed through to natural resource equity valuations during the month.  Global REITs fell modestly (−0.3%), with the U.S. dropping for the second straight month (−2.8%) despite lower U.S. Treasury yields.  Declines in the REIT market appeared to be driven by ongoing concerns about valuations and pockets of weakness, notably the impact of e-commerce on segments of the retail sector.  The European region (+6.8%)—the UK (+8.9%) in particular―were bright spots within the global REIT market.  The region appeared to be boosted by a stronger euro and pound, generally lower government bond yields, and the results of the first round of the French presidential elections.  In the U.K., REITs also appeared to benefit from resilient underlying asset values and leasing activity.  After falling more than 20% (in local terms) immediately after the Brexit referendum vote in June 2016, U.K. REITs have recovered most of those losses in local terms (−1.6%). 

Elsewhere within real assets, U.S. TIPS (+0.6%) delivered positive absolute returns.  Inflation expectations were mixed with a 5 bps rise in five-year breakeven inflation rates, to 1.8%, but a 5 bps drop in 10-year breakeven rates, to 1.9%.  Positive returns were more attributable to the interest rate rally rather than increased demand for inflation protection.  U.S. Treasury yields declined and the yield curve flattened.  The drop in nominal rates put downward pressure on real rates, helping TIPS generate positive returns despite mixed expectations for inflation.

The U.S. dollar weakened in April, with a disappointing first quarter GDP report a key contributor to the descent.  The Dollar Spot Index fell 1.5% as rallies in the euro (+1.8%) and British pound (+3.5%) more than offset the decline in the Canadian dollar (−2.5%) and the flat Japanese yen.  As was the case with March, divergence against the dollar was notable across geographies, with European currencies rallying and those in the Americas and in Asia-Pacific largely falling.  A sell-off in commodities was a common factor that fostered weakness in select regions.  As a result, commodity-related currencies such as the Canadian dollar (−2.5%), Australian dollar (−2.0%), New Zealand dollar (−1.8%), Russian ruble (−1.1%), Brazilian real (−0.7%), and Mexican peso (−0.8%) all depreciated against the greenback.  In contrast, better than expected economic data has been supportive of core and peripheral European currencies.  In addition, a modest relief rally may have ensued in the region after the results of the first round of the French presidential elections met expectations, stemming the tide of populism that has surprised markets.  Outside of these broad themes, a number of idiosyncratic issues impacted currencies.  The Turkish lira shrugged off a recent referendum that shifted power from parliament to President Recep Erdogan and gained 2.5% for the month.  Another example is the 2.0% gain in the Malaysian ringgit, which moved with rising palm oil prices.

 

 

Indices referenced are unmanaged and cannot be invested in directly.  Index returns do not reflect any investment management fees or transaction expenses.  Past performance is not an indication of future results. This report is intended for informational purposes only; it does not constitute an offer, nor does it invite anyone to make an offer to buy or sell securities.  Information herein has been obtained from third-party sources that are believed to be reliable; however, the accuracy of the data is not guaranteed and may not have been independently verified.  The content of this report is current as of the date indicated and is subject to change without notice.  It does not take into account the specific investment objectives, financial situations, or needs of individual or institutional investors.   All commentary contained within is the opinion of Prime Buchholz and intended solely for our clients. Unless otherwise noted, FactSet and Bloomberg are the sources for data used in this report.   

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