Market Review for the past 6 months

Six Month Letter – Global Investment Overview

The second half of 2017 continued to build on the generally positive performance of the previoussix months. In the United States, the S&P 500 continued to tick higher following strong macroeconomic data, earnings reports, weakness in the US dollar and hopes of hopes of tax reform. European equities generally posted gains, backed by positive economic data. Political risk also played its part as did the speculation on whether or not the European Central Bank (ECB) will soon start reducing its stimulus, and howthat would be implemeted. Emerging markets posted positive performances, supported by a reduction in political risk in countries like Brazil. Meanwhile, we have witnessed a flattening yield curves both in the US and in Germany, with the former having interest rate expectations revised due to developments with regards to the American tax reform bill which shall act as an economic stimulus.

Corporate bonds continued where they left off, capping off a good year with further positive total returns – outperforming government bonds. Investment grade debt generally produced better returns than high yield debt with the exception of Europe, as Euro and Sterling high yield bonds were on top of the list of gainers.

European Union

European equities maintained a positive stance for the last 6 months of the year, despite ending the last quarter marginally in negative territory, partly as a result of the strengthening of the Euro and an element of profit taking.

These gains were supported by economic data that showed that European markets are still on the path of recovery. Gross Domestic Product (GDP)growth was confirmed at 0.6% in the third quarter, a slightly lower figure than the second quarter, but higher than the first quarter. In October, unemployment rate dropped even further to 8.8%, the lowest since January 2009. During the same month, after much speculation, the ECB announced the way forward with regards to the quantitative easing program. The program has been extended until September 2018, but the rate at which the ECB purchases sovereign securities will be halved from €60Bn per month to €30Bn – lifting the Euro currency higher against its peers. Government yields in Spain, Italy and France responded positively to the announcement, to then be reversed due to political factors that followed.

The currency however was also impacted by political risk, particularly in Germany and Spain. The election result in Germany proved to be more difficult for Angela Merkel to negotiate and form a coalition party. In Spain, Catalonia held a regional election on December 21 in relation to the proposed Catalan Independence, however, the election result further complicated the matter. Although parties favouring independence managed to retain a slim majority, the ‘Citizens’ party which strongly opposes independence, emerged as the largest single party.

United States

US equities posted solid gains during the 6-month period to conclude 2017 the same way as it started. US equities advanced significantly in the last six months of 2017 as indicated by the major indiceswhich registered double-digit gains. Advances in share prices to record highs were supported by solid macroeconomic data as economic growth was calculated at a very solid 3.1% in the second quarter, and 3% in quarter three. The earnings reporting season had a positive impact on the equity market, as did the weakening of the dollar.Moreover, expectations of an interest rate hike were realised in December as the US Federal Reserve raised interest rates by a further 25 basis points. The Fed also revised its economic growth projections up to 2.5% from 2.1%, as Treasury yields rose, which also led to a flattening yield curve.

United Kingdom

UK equities registered solid gains in the period, in line with the global economy and its synchronised recovery.An appreciation of the Sterling against the dollar had an adverse impact on the UK market, especially on internationally diversified securities. Bond yields shifted higher as central banks seem to be tightening their monetary policies, as the Bank of England indicated a possible rise in interest rate in September   –    which materialised in November when the BoE lifted interest rates for the first time in 10 years from 0.25% to 0.5%. Inflation breached the BoE’s upper limit in November as it stood at 3.1% and GDP growth forecasts were revised downwards in the same month. There are however signs of a possible improvement in sentiment with the UK and the European Union seen to be progressing in the Brexit negotiations.Higher crude oil prices and Industrial Metal prices both climbed higher, to the benefit of industries such as mining and the oil and gas sector, both of which were some of the best performers for the period.

Emerging Economies

Emerging economies outperformed developed markets in the last two quarters of 2017 as they posted solid gains, backed by global economic growth and positive political developments. Just like the first half of the year, the MSCI EM Index returned double-digit gains as opposed to single-digit gains registered in the MCSI World Index. Some of the key drivers of this positive performance were lower inflation figures, a rally of the oil prices and positive economic data in China. Commodity prices also increased and this helped countries such as Chile and Peru to perform well. Brazil registered a very strong performance in the third quarter but then retreated in the fourth quarter due to currency weakness.


The MSE Total Return Equity Index registered losses of 3.91% during the second half of the year as it closed the year at 8,669.13 points. The best performances in the equitymarket were registered by Malta International Airport plc, MIDI plc and SanTumas Shareholdings plc, albeit witnessing an overall underperformance by the index when compared to the broader European market. Meanwhile, Bank of Valletta plc €150 million rights issue went ahead in November and was very well received by shareholders. As expected this had a negative impact on the price of the equity as the price adjusted to the additional share capital now in issue.

The corporate debt market closed the year strongly as there were more gainers than fallers during the 6-month period. Yields in the sovereign debt market fell as all Malta Government Stocks experienced an increase in value overall during the second half of 2017.

What Lies Ahead

As we have previously reiterated the importance of having different asset classes within a portfolio so as to diversify your portfolio and reduce concentrated risk, this might proof to be even more important in a scenario were interest rate levels on a global levelcontinuetrending higher. 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.

Through our different investment strategies available through the Merill SICAV plc sub-funds, one can easily diversify investment risk, increase exposure to various asset classes, while embarking onto an optimal investment strategy which best suitsyour overall risk profile. We thus encourage you to schedule a meeting with one of our investment advisors at your earliest convenience so as 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 €61 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.