Summary

• Market volatility is the new game in town.After the initial recovery from the February “flash-crash”, equity markets dipped again with the technology sector taking the biggest knock. The S&P 500 ended down 2.7%.
• Fears of a trade war hit markets as President Trump announces increases in tariffs, especially on Chinese hi-tech imports. China responded commensurately.A full-blown trade war is not expected and economic impact expected to be relatively small but for the US, positive progress is being made in NAFTA negotiations.
• The US Fed delivered another 0.25% increase in Fed Funds rate, largely as expected, the 6^thincrease since December 2015, as monetary policy normalisation continues.

Market update

2018 continues to deliver significantly higher market volatility than the most recent past, with the VIX index remaining at elevated levels (around 20.0 at month end) compared to levels of around 10 for most of 2017.  The euphoria that greeted the passing of US tax reform has subsided and markets now focus on potential risks, especially given elevated equity market valuations. Any factors which could possibly be catalysts for disruption is now under the market microscope.

By month end, the focus had shifted to the opening salvo of a trade war due to the imposition of increased import tariffs by the US on some of its trading partners.  Despite the rhetoric we do not expect the economic impact to be significant and there is still plenty of room for negotiation. 

With the Fed delivering the 6^th rate hike in this cycle during March, a further part of the monetary policy tailwind that has helped risk assets is now removed.  With Global Purchasing Managers Index (PMI) numbers beginning to peak out, we are entering sensitive times for markets.  However, earnings growth numbers continue to underpin positive market sentiment.

Commodity prices stumbled somewhat as the trade war talk put paid to expectations of heightened demand growth, with the CRB Raw Industrial index down 0.6%.  For the time being the synchronised global economic recovery still remains intact, but some concerns around the slowdown in the China Credit Impulse growth rate are beginning to worry some market analysts.

Currency wise, the euro remained stable against the US dollar, while the Japanese yen strength finally began to dissipate towards month end.  The Mexican peso remains one of the strongest performing emerging market currencies year-to-date, having strengthened by 7.5% against the US dollar by end March.

Bond markets remained fairly stable – trapped between equity market weakness and higher inflation prospects, with US 10 year treasuries trading in a range between 2.75% - 2.95% in the past two months.

Strategy

During the month we gradually brought equity positions closer towards neutral positions against benchmarks, although economic conditions still dictate that upside returns are more likely to come from equity positions rather than fixed income.  As such in any market corrections we are more likely to increase the equity weight again.

In fixed income we continue with a slight underweight exposure as well as an underweight fixed income duration position as we still believe that the synchronised global recovery points towards more monetary policy normalisation as well as a significant tail risk of higher inflation.

We have exited our exposure in Turkish bonds, as well as closing out the Turkish lira currency position as they struggle with political turmoil, policy uncertainty and an uncertain inflation trajectory.  We retain an overweight position in Mexican peso and Indian rupee for the time being.

After the selloff in the global Real Estate Investment Trust (REIT) market in February we have started positioning more positively in that market, given our relative underweight in this space. 

For the time being we have also retained thematic exposure to our energy equity basket, and remain cautiously optimistic on that position as well as our exposure to India on both fixed income and equity.