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Market Report

Market Report 

The graph below summarises the index returns on the main asset classes/regions for the year to 31 March 2018. Returns are shown in sterling terms and local currency terms.



Equities
UK equities posted a return of 1.2% over the year, lagging the wider equity market. In particular, the UK’s difficult political situation and lowered official growth forecasts dragged down investor sentiment towards the UK market. This meant that the UK suffered significantly during the heightened market volatility seen in Q1 2018. Sterling appreciation also detracted from returns due to the UK stock exchange's large exposure to companies that earn overseas revenue.

The US equity market rally held firm throughout 2017 but fell back over the first quarter of 2018. The equity market fall was in large triggered by expectations of a pick-up in US inflation, off the back of higher than forecast wage inflation data. Yet despite this, and the increasing trade tensions between the US and China towards the end of the year, the US market faired relatively well. Solid sets of corporate earnings reports, robust economic data and expectations for tax reform helped to support the market. US equities posted a return of 14.2% in local currency terms but sterling appreciation led to a much lower return of 1.8% in sterling terms. The Fed continued hiking interest rates throughout the year with three rate increases over the course of the 12 months.

European equities returned 4.2% in local currency terms and 4.3% in euro terms. Political risks, which had dampened investor enthusiasm for the region in earlier periods, fell back over 2017 as far-right political parties were defeated in both France and Holland. However, tensions resurfaced during the first quarter of 2018 when the Five-Star Movement gained support in Italian elections, resulting in a hung parliament.

Japanese equities returned 15.1% in local currency terms, retracting some of the initial gains after suffering during the first quarter of the year. Strong corporate earnings over the year supported the market. A positive result in the snap Japanese election and investor expectations of a continuation in easy monetary policy, against the low inflation backdrop, resulted in strong performance over the majority of 2017.

Emerging markets performed strongly over the year as improving macroeconomic fundamentals alongside capital inflows bolstered returns. Despite increased fears of protectionism and global trade wars towards the end of the period, the region fared well, returning 22.4% in local currency terms.

Bonds

UK fixed gilts returned 0.5%, as did their index-linked counterparts. Increasing expectations of interest rate hikes by the Bank of England pushed yields up over the year, apart from at long durations. Dovish remarks by the central bank at the end of 2017 saw yields decreasing again. However, yields increased significantly in Q1 2018 on the back of global inflationary expectations.

Index-linked gilts underperformed fixed gilts at long-term maturities. Short and medium maturity index-linked bonds posted negative returns. Breakeven inflation, the difference between nominal and real yields, inched lower across maturities over the year.

Globally, most corporate bond spreads (the difference between the yields on non-government bonds and equivalent maturity government bonds) narrowed most dramatically in the second quarter of 2017 due to improving investor sentiment after encouraging economic data releases, both in the UK and globally as well as BoE intervention in the corporate bond market.


Property

The IPD Monthly Index moved up by 11.0% over the year, supported by a mixture of stable income returns and a strong recovery in capital values. The latter fell dramatically in the aftermath of the EU Referendum vote but has recovered over the last twelve months. Capital values have returned to pre-Brexit levels. Meanwhile, rental growth has slowed but remained at decent levels. Vacancy rates edged slightly higher.

Infrastructure

Infrastructure as an asset class generally performed well over the last 12 months. Assets under management continued to grow over the year with strong investor demand. However some managers struggled to invest capital as deal activity fell behind levels seen in the previous years.