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5th April 2018
Market Commentary April 2018

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Three words to sum up the stock markets’ first quarter: Correction, Protection and Detection.

The first quarter of 2018 has been one of the weakest periods for global stock markets for several years. Within our January newsletter we highlighted that US interest rate and bond yield rhetoric could well trigger caution. This became apparent towards the end of January as 10-year US Treasury yields approached the psychological 3% level; and as prices fell, global equities inevitably followed suit. This halted the US market's record of 11 consecutive quarter-on-quarter increases.

On the one hand, central banks restoring normality to markets by increasing interest rates is much needed; however, the end of financial stimulus will be another trigger point for markets to bear as the Fed withdraws a further $30 billion this month. There is also the Vix (volatility index) to consider, in light of the artificial calmness that ended 2017; the Vix rose 81% in the first quarter of 2018. Trump managed to compound this uncertain backdrop with talk of trade wars and the imposition of tariffs. It must seem odd for voters in western democracies to see politicians enact campaign promises but at least the US had a choice of two candidates; Russia seemingly still prefers the one candidate electoral system. The events in Salisbury heighten the "Cold War" rhetoric as investigations into their cause are ongoing; and the quarter finished with calls for enquiries into several technology stocks and their use of our data during recent political campaigns.

Despite the trade wars and interest rate increases, the first quarter saw a record number of bids and mergers amounting to $1.2 trillion, helped by the clarity over tax reforms, a strong economic backdrop and cash still being cheap to borrow, with highly valued equity to issue. We believe this theme will continue throughout the year. Within the UK, Melrose has just acquired GKN; Barclays and Merlin have attracted value investor interest; and GlaxoSmithKline has announced a sensible multi billion acquisition. Whilst bids are swirling around for Smurfit Kappa and Shire, Unilever and Reckitt Benckiser are two others which we believe are likely to be involved in significant corporate restructuring and activity.

One bright light throughout the first quarter was another 5% increase in the oil price, buoyed by the global economic activity. This is welcome news for two large UK listed companies, Royal Dutch Shell and BP. This is also positive news for pension funds and investors benefitting from the strong dividend flow from this sector. In fact, there is talk that between March and May 2018, $400 billion of dividends are due to be paid globally.

Finally, the UK. In January we did highlight our concerns from both an economic and political perspective. The UK has continued to be significantly weaker than most leading world markets. We do see this continuing, particularly with the continued fall in consumer confidence as evidenced by many recent retail profit warnings. There will, however, be a time to move back to an overweight position in UK equities. We know that the market overreacts on both the upside and downside, but with over a 10% fall in just two months we are seeing pockets of value develop within our domestic focussed UK companies.