The second quarter of 2018 continued on the trend of the first three months as it was dominated by volatility as a result of geopolitical uncertainty, particularly the trade war between China and the United States. In the end however, both US and European equities closed in positive territory as the negative effects of such uncertainty was offset by solid economic data and positive earnings announcements.

UK and Japanese equities also advanced, driven by devaluations in the Sterling and the Yen. A stronger dollar had an adverse impact on emerging markets equities, as did the effect of increasing trade tensions on various Asian markets.

Corporate debt instruments however, generally posted falls, although towards the end of the quarter, certain patterns of investors’ flight to safety were emerging.  The European Central Bank announced that interest rate levels will be unchanged throughout the summer of 2019. US 10-year Treasury yields increased significantly, reaching the highest levels in seven years during May. However, when risk aversion kicked in towards June, yields started to contract.

Eurozone

The Eurozone was dominated by political risk, especially in Italy as the result of a March election was somewhat inconclusive. At one point, it was even feared that a referendum might have to be called regarding Italy’s membership of the euro. Ultimately, a governing coalition was formed. Elections in Spain proved more straightforward as although there was a change in government, the markets reacted quite calmly to the news. In Germany, members of the governing coalition clashed over issues regarding immigration policy.

In the end, European equities posted positive returns led by the energy, information technology and healthcare sectors. At the other end of the spectrum, financials, particularly Italian banks were negatively hit by this political uncertainty. Automobile equities were also down, after US President, Donald Trump suggested the possibility of tariffs being imposed on imported vehicles.

Economic data regarding the first quarter of 2018 was published, showing that the Eurozone was still growing steadily, but at a slower pace of 0.4%, compared to the 0.7% registered for the last three months of 2018. The European Central Bank announced that it intends to terminate its quantitive easing program in December of 2018, while the interest rates shall remain at their current levels throughout the summer of 2019.

United States

The main focus in the US markets for the second quarter was undoubtedly the US-China trade war as the Trump administration kicked off the process of imposing tariffs on imports from China. Another source of uncertainty was the decision by President Trump to withdraw from the Iran Nuclear accord.

In spite of the severity of these issues, the effect of positive economic data ultimately seemed to prevail as equities advanced over the quarter. Unemployment continued to drift further lower, to an 18-year low of 2.8%, while wages continued their steady growth. The Federal Reserve marginally revised the growth and inflation forecasts upwards for 2018. The Fed anticipates two further rate hikes during 2018, and another three during 2019.

The top performing sectors were the energy, consumer discretionary and technology sectors while defensive areas such as real estate and utilities also enjoyed a strong quarter. Financial stocks also suffered as the yield curve flattened during the three months under review.

United Kingdom

In the United Kingdom, stocks performed better than their global counterparts as the FTSE All-Shares Index fully recovered the loss registered during the previous quarter, climbing a sizeable 9.2%. These gains are a reflection of a slightly improved sentiment towards the UK by international investors, from the extremely negative levels reached during the first quarter.

 

The value of the Pound declined over the period as the Bank of England did not announce any rate hikes. This, coupled with the strengthening of the dollar had a positive effect on UK equities as they became more attractive to foreign investors, while internationally exposed companies could also benefit from favourable exchange rates.

Emerging Economies

Conversely, emerging markets posted a negative performance during the second quarter, mainly driven by the strengthening of the US dollar and international trade tensions.

The weakest performer was the Brazilian market. Turkey was another negative performer as a result emergency rate hikes by the central bank and political tension related to the early presidential election which was ultimately won by President Erdogan.

Other European emerging markets such as Poland and Hungary were hit by the negative performances of the Eurozone and the political uncertainty in Italy. Similarly, emerging markets in Asia were also affected by the trade tensions between the US and China.

Malta

The equity market in Malta erased the previous quarter’s marginal gain as the MSE Equity Total Return Index declined by 0.466%. The best performing equity among the eight gainers, was MIDI plc, as the company continues to advance in its Manoel Island Masterplan project. On the other hand, 13 equities headed south, led by the previous quarter’s top performer, Trident Estates plc which fell in value by 33.158% during this period.

In the sovereign debt market, yields were significantly higher as all Malta Government Stocks bar one lost in value. In the corporate debt market however, yields were generally down as gainers slightly outweighed fallers.

What Lies Ahead

 

Investors should look beyond short-term market volatility and remain focused on their long-term goals. Investors with a long-term investment horizon should use market volatility in their favour and take advantage of opportunities when markets sell-off.

In order to reduce portfolio fluctuations, we remain focused on diversified portfolios. Investors must shy away from concentrated portfolios in order to minimise risks. By diversified portfolios we do not mean a portfolio made up of a small number of different bond issuers, but a portfolio with different exposures to different asset classes such as investment grade bonds, sovereign bonds, high yield bonds, local opportunities, growth and value equities. The benefits of diversification are witnessed over the long-term and hence investors should be patient and try not to time the market. However, with the help of their investment adviser, they should strive to take advantage of opportunities when they arise.

Through the three Merill Funds,  which we manage internally, Jesmond Mizzi Financial Advisors are offering investors the opportunity to achieve their investment objectives through diversified strategies. The three strategies combined provide investors with a highly diversified strategy which aims to generate positive returns during different periods of the economic cycle while at the same time minimizing risks.