Last week, the positive market momentum of previous weeks continued across Europe and the US. This was supported by a more stable political outlook in Europe following Emmanuel Macron’s win in the final round of the French presidential election. The result fed into equity markets as the DAX and CAC 40 registered positive moves in the week. In the US, equities also continued to move higher with the technology-heavy NASDAQ touching record highs as tech companies reported impressive earnings growth. We maintain a positive outlook for equities, particularly in Japan and Europe.
UK rates stay put
There was a focus on the Bank of England as it held interest rates at an expected 0.25%. However, the near term outlook for GDP growth was revised downwards – and inflation upwards – and as a result, sterling weakened slightly.
Strong macro data from Italy and France, particularly industrial production and sentiment surveys, again supported our positive outlook for European equities.
In the emerging markets, Brazil reported an inflation rate of just 4%, the lowest rate since 2007. This is despite several interest rate cuts over the past six months that have reduced the policy rate to 11.15 from 14.15% in October last year. This highlights how high local yields are in many emerging markets compared to developed markets, one of the reasons we like emerging market debt.
The case for emerging market debt
Our emerging market local currency debt has broadly generated returns in excess of lower-risk US treasuries, as well as the relatively more risky US high yield bonds (see below) over the year to date.
So what are the main drivers of performance in 2017?
Firstly, global economic data continues to improve with manufacturing purchasing managers’ indices (PMIs) strengthening and trade activity on the rise. We believe this is positive for both developed and emerging markets.