The opening three months of 2019 were very different to the difficult final quarter of 2018, with rebounding investor sentiment leading to a strong market rally.
While 2018 was marked by issues such as tighter monetary policy and the threat of trade wars, these headwinds have receded in 2019 and paved the way for a pro-risk climate.
Below, we highlight where the returns were made during 2019’s first quarter using a series of charts from the FE Analytics.
Asset classes
The chart below shows how positive the opening quarter of 2019 was for risk assets, with a total return of just under 10 per cent for the MSCI AC World index and a jump in commodities, especially oil.
Performance of asset classes over Q1 2019
Source: FE Analytics
In an article earlier this week, BlackRock Investment Institute global chief investment strategist Richard Turnill said: “The rally in risk assets so far this year can be seen as a snapback from market angst in late 2018 about an imminent economic slowdown and perceptions of overly hawkish Fed policy.
“Yet we caution against extrapolating recent performance through year-end. The path for risk assets to move higher is narrow – and we see risks that could knock markets off track.”
Given the rally playing out in global stock markets, areas of perceived safety lagged with government bonds and gold both posting a negative quarter. There was also a big drop in volatility from the more elevated levels of 2018, as reflected in the fall in the VIX index – the so-called fear gauge of Wall Street.
Geographies
Turning to how differing geographies’ equity markets performed, the view that 2019’s opening quarter was a strong one for risk assets across the board is backed up by the below chart, which shows positive returns in all major regions.
The S&P 500 led the way with a 10.91 per cent total return (in sterling terms). The US was bolstered during the three-month period by the surprise turnaround from the Federal Reserve, when its policymakers revealed that they do not expect any more interest rate increases in 2019.
Performance of regions over Q1 2019
Source: FE Analytics
The FTSE All Share also had a good month, despite the fact that the UK is struggling to make meaningful progress in its exit from the EU and fears that a ‘no deal’ Brexit is back on the table.
When it comes to market caps, the FTSE 100 and the FTSE 250 were both up by around 9.5 per cent, while the FTSE Small Cap made a 6.24 per cent total return.
Investment style
The opening three months of the year saw the continuation of a trend that has been in play for much of the post-financial crisis period: the outperformance of the quality-growth investment style over value.
Performance of styles over Q1 2019
Source: FE Analytics
Both the quality and growth styles made total returns of around 12 per cent during the first quarter. Value stocks made a pretty decent return too but were well behind the other two styles.
This was reflected in the latest Bank of America Merrill Lynch Global Fund Manager Survey, which found that a net 64 per cent of asset allocators think high-quality companies will outperform low-quality stocks over the coming 12 months.
Industries
The clear winner of the quarter when we look at FTSE industry performance is technology, which made a total return of more than 24 per cent over the three months in question.
Performance of FTSE industries over Q1 2019
Source: FE Analytics
Tech stocks rebounded globally last quarter, after being at the centre of the sell-offs that hit markets at the end of 2018. However, the bounce in 2019 has been attributed to positive developments in the trade relationship between the US and China as well as an expected rise in IT spending, demand for artificial intelligence and rapid adoption of cloud services.
Other ‘pro-risk’ industries performed strongly during the past quarter, with the FTSE Basic Materials index being the second best performer thanks to rising commodity prices. Financial services, oil & gas and industrials also did well.
Equity funds
Turning to how funds performed in this environment, FE Analytics shows the best performing equity sector of the quarter was IA China/Greater China. Factors such as the thawing tensions with the US, MSCI’s move to accelerate the country’s A-shares in its Emerging Markets index, record inflows of foreign investment and strong buying by domestic retail investors have been cited as reasons for the rally.
GAM Star China Equity was the strongest performer during the quarter after making a 23.97 per cent total return. It was followed by Matthews China (20.18 per cent), JPM Greater China (19.60 per cent) and GS China Opportunity Equity Portfolio (18.72 per cent).
Performance of sectors over Q1 2019
Source: FE Analytics
IA North America comes in second place, following the dovish turn from the Federal Reserve. Its top three performers were Brown Advisory US Mid-Cap Growth (18.50 per cent), GS US Focused Growth Equity Portfolio (18.04 per cent) and Lord Abbett U.S. Growth Leaders (17.26 per cent).
In third was the popular IA Global sector, where funds tend to have a high weighting to the US. Aubrey Global Conviction (up 18.97 per cent), Baillie Gifford Global Discovery (17.43 per cent) and Pictet Global Environmental Opportunities (17.36 per cent) were the highest returners here.
Bond funds
The IA UK Index Linked Gilts sector was the best performing fixed income sector last quarter as its average member made a 6.08 per cent total return. Gilts rallied in March after the Federal Reserve essentially said there would be no more rate rises in 2019.
Performance of sectors over Q1 2019
Source: FE Analytics
Janus Henderson Index-Linked Bond and Insight UK Index Linked Bond were the sector’s strongest performers in the first quarter after both making 6.75 per cent. AXA Sterling Index Linked Bond, iShares Index Linked Gilt Index (UK) and Newton Index Linked Gilt all made returns of around 6.5 per cent.
Reflecting the risk-on environment, the IA Sterling High Yield sector also had a good quarter. Its three best performers were Lord Abbett High Yield (up 6.96 per cent), Pimco GIS US High Yield Bond (6.71 per cent) and Hermes Global High Yield Credit (6.62 per cent).
Multi-asset and specialist funds
When it comes to multi-asset funds and strategies with a more focused mandate, the IA Technology & Telecommunications sector came out on top with an average total return of 14.20 per cent.
T. Rowe Price Global Technology Equity was the strongest performer from this peer group with its 17.80 per cent total return, while AXA Framlington Global Technology isn’t too far behind after making 17.78 per cent. Polar Capital Global Technology and GAM Star Technology also made more than 16 per cent during the quarter.
Performance of sectors over Q1 2019
Source: FE Analytics
The IA Property Other, IA Mixed Investment 40-85% Shares and IA Flexible Investment peer groups also had relatively strong months.
Within the IA Specialist sector, eight funds made total returns of more than 15 per cent during the month – led by Smith & Williamson Artificial Intelligence with its 20.70 per cent gain. Robeco Global FinTech Equities was up 18.02 per cent while BMO Overseas Equity-Linked UK Inflation made 17 per cent.