The first quarter of 2018 was dominated by heightened uncertainty with respect to the path of interest rate rises, trade concerns between the U.S and China, and higher inflation. Despite kicking off the year strongly due to tax reforms, US equities ultimately posted negative quarterly returns. Fears regarding US rates and trade also affected other markets such as the equity markets in the Eurozone and Japan, both of which also traded in negative territory. Similarly, UK equities drifted lower as a result of a stronger Sterling and expectations of rate hikes by the Bank of England. On the contrary, emerging markets outperformed,  with equities deliveringpositive return in US dollars.

Treasury yields in the US were up over the quarter, as did sovereign yields in the UK and Germany.  Corporate bonds, particularly investment grade debt in US dollars, posted negative returns, underperforming sovereign debt instruments. Meanwhile, high yield bonds denominated in Sterling performed relatively better.


Concerns in the US market regarding interest rates and trade disputes had a spill over effect in the Eurozone. In fact, the equity market followed a similar path to the US as it also registered declines over the quarter, with the bulk of the losses being registered in March. Macroeconomic data for the Eurozone remained positive as quarterly GDP growth was stable at 0.6% while the unemployment figure was unchanged at 8.6% for January. Expectations however did start to change as future growth is expected to remain solid, but at a slower pace. Inflation was below the European Central Bank target, and consequently, Mario Draghi, the ECB chairman, confirmed that rates will not be raised at least until the Quantitative Easing Programme is terminated.

European markets were also hit by political events this quarter, mainly the German election, followed by the Italian election. With respect, to the latter, which was held on March4, 2018, no party managed to win an outright majority, resulting in a hung parliament- Nevertheless, the Italian equity market was amongst the only indices to still close the period in positive territory.In Germany, Angela Merkel’s CDU/CSU party reached a coalition agreement with the centre-left SPD, meaning that Merkel will remain as chancellor.


The equity market in Malta posted minimal gains over the quarter as the MSE Equity Total Return Index climbed by a marginal 0.097%. A positive boost to the MSE Index was the introduction of Trident Estates plc shares(+53.23%)– spun-off from Simonds Farsons Cisk plc– which were listed for trading on the Malta Stock Exchange in February; as well as a result of substantial gains across shares of HSBC Bank Malta plc (+4.26%) and Malta International Airport plc (+4.26%). On the other hand, no less than 16 equities were a drag to the index, as only five other equities ended the quarter in positive territory.

In the sovereign debt market, yields were higher as most Malta Government Stocks lost in value except for four long-dated government stocks. This was in line with the broader European sovereign debt market, experiencing a flattenning yield curve, as longer debt issuances gained ground (as yields declined); while short-to-medium debt issuances experienced declines (as yields headed higher). The corporate debt market was more balanced as gainers just marginally offset fallers during the period.


Equities in the US started the year strongly as business confidence reached record-breaking highs throughout the quarter. One of the main reasons for the strong performance was the tax reform approved by the US Senate in late December, aimed at boosting economic growth by introducing various tax cuts to corporations, small businesses and individuals. Encouraging economic data and positive earnings announcements also backed the strong performance in the earlier portion of the quarter, with the cyclical sectors leading the charge.

The tables turned in the later stages of the quarter as volatility rose to levels last seen in ’15 which dragged the markets down, presumably because of two main reasons. Firstly, higher-than-expected inflation figures put pressure on the Federal Reserve to raise interest rates. This led to concerns that the Fed might decide to increase rates at a faster pace than planned. Although it did raise interest rates by 25 basis points in March, it did not revise its plan to implement three rate hikes this year. The second probable reason for the increased levels of volatility, is the trade conflict between the US and China. The recent tariff hikes proposed in relation to imported solar panel, aluminium and steel are examples of protectionist policies under Trump’s administration- to which China responded by threatening to introduce tariffs on American products.

Defensive areas outperformed the market during March, as investors looked for safer investments in light of the increased market volatility. This uncertainty caused the S&P 500 index to surrender its earlier gains, ultimately closing the quarter lower.


In relation to the UK bond market, yields were up in line with the global sell-off in the bond market. UK Equities also performed weakly as the FTSE All-Shares index posted a loss of 6.9% over the quarter. Political uncertainty was still one of the main factors dominating the UK markets. The outlook for economic growth was still weak, however the Bank of England marginally improved its growth forecast from 1.7% to 1.8%.

This negative performance in the UK markets was also somewhat amplified by a stronger Sterling, driven by expectations of a faster-than-expected rise in interest rates by the Bank of England. However, some progress was witnessed with respect to the Brexit negotiations and the terms on the transitionary period to be followed after the formal exit from the EU.


Emerging markets had a positive quarter in spite of the global markets volatility. Brazil was the top performer as a result of positive political developments. Russia also performed strongly, partly due to interest rate cuts by the Russian central bank, and partly due to an S&P rating upgrade of the country’s debt to investment grade status. Needless to say, Chinese equity markets experienced increased volatility towards the end of the quarter, caused by the trade tensions with the US.


As we have previously reiterated the importance of having different asset classes within a portfolio is essential to reduce concentration risk, which may prove to be even more important in a scenario were interest rate levelscontinue to trend higher, while also experiencing a higher degree of market risk (increased volatility). Having central banks gradually reversing their policies and adopting a contractionary stance as global growth picks up might dent the fixed-income paying asset class – whereas the more volatile equity asset class could still act as a cushion to the downside in an economic environment where interest rate levels are no longer trending lower.

One can easily diversify investment riskthrough one of our different investment strategieswithin the Merill SICAV plc, increasing exposure to various asset classes, while embarking onto an optimal investment strategy which best suitsyour overall risk profile. For those of who have not yet scheduled a  meeting with one of our investment advisors since last January, we encourage you to do so at your earliest convenience. This would enable us to  review your current portfolio composition, re-asses your risk profile, and discuss any possible recommended changes to your portfolio.

Since the launch of the Merill Total Return Income Fund in February 2016, and the Merill High Income Fund and Merill Global Equity Income Fund in the first quarter of 2017, assets under management have surpassed the €64 million mark. Jesmond Mizzi Financial Advisors acts as advisor and promoter to the Funds and the aim of these sub-funds is to provide clients with a more active management style while investing in different asset classes and hence providing for adequate diversification.