The second quarter of 2018 has seen markets on a firmer footing than the opening three months of the year, when both equities and bonds went through a rough patch. 
As the previous article of this regular feature showed, 2018’s first quarter saw investors struggle to make money in any part of the market after unusually low levels of volatility gave way to more turbulent conditions.
The most recent three-month period has been somewhat better, however, with most assets grinding higher despite the nervousness sparked by moves from US president Donald Trump to impose trade tariffs on countries such as China and the EU bloc.
In the following article, FE Trustnet takes a closer look at the second quarter of 2018 – considering factors such as investment style, FTSE All Share industries and Investment Association funds.
Asset classes
On a top-level look, the strongest area of the market in the second quarter of 2018 was oil as the Brent crude spot price surged almost 25 per cent over the three-month period. During July, the oil price reached its highest level since 2014.
Analysts point to the recent OPEC meeting as one of the reasons why the oil price has risen. Although the group – in agreement with Russia – decided to increase production for the first time since launching production cuts in November 2016, the scale of this underwhelmed the market and led to further price rises.
Performance of indices over Q2 2018
Source: FE Analytics
Global equities and bonds also ended the quarter higher, in sharp contrast to the end of 2018’s opening three months when many assets were hit hard by the return of volatility. The second quarter wasn’t without problems, however, as markets were rattled by the risk of a global trade war as the US starts implementing tariffs.
Karen Ward, chief market strategist for Europe, Middle East & Africa at JP Morgan Asset Management, said: “Our central expectation is that these skirmishes do not escalate into a full trade war. Although ‘cheap’ imports challenge some sectors and workers in the US, the vast majority of US households benefit from these lower prices.
“Much does depend on how these policies are received domestically as the mid-term elections approach. It is unclear at this stage whether the US administration has a political incentive to dial it up or dial it down before voters go to the ballot box. This uncertainty alone argues for a more cautious approach to risk.”
Geographies
Within global equities, the US had the strongest quarter thanks to a 9.74 per cent gain in the S&P 500 (in sterling terms). Although US stocks are at the epicentre of the trade war fears, many investors believe they have the least to lose compared with their global peers; furthermore, the country is benefiting from sustainable economic growth and healthy corporate earnings.
The quarter’s second-best performer was the FTSE All Share, which posted a 9.20 per cent total return. While the UK has lagged other equity markets in the wake of the referendum to leave the European Union, sentiment towards the country is showing signs of recovery – the latest BofA ML Global Fund Manager Survey found asset allocators narrowed their underweight to the UK to 3 per cent in June, off a low of 41 per cent in March this year.
Performance of indices over Q2 2018
Source: FE Analytics
The worst performing region was emerging markets; the MSCI Emerging Markets index was down 2.21 per cent over the three-month period. Sentiment towards emerging markets have been soured by the US trade tariff risk as well as being hit by a strong US dollar.
When it comes to the so-called BRIC countries, Brazil had the worst quarter after political uncertainty over a presidential election in October, a more bearish outlook for the economy and the tighter monetary policy in the US prompted a fall of more than 20 per cent (in sterling); MSCI Russia was down 17 basis points in the quarter while China was up 2.53 per cent and Indian equities rose 5.61 per cent.
Investment style
As the chart below shows, global equities falling under the growth style had the strongest quarter after gaining 8.66 per cent. On a 10-year view, the MSCI AC World Growth index has risen 192.19 per cent compared with 140.57 per cent from its value counterpart.
The MSCI AC World Value index was the weakest of the three although it was still able to post a 4.88 per cent total return during 2018’s second quarter.
Performance of indices over Q2 2018
Source: FE Analytics
Yoram Lustig, who heads up T. Rowe Price’s multi-asset solutions in Europe, Middle East & Africa, recently noted that investors should consider allocating more to value stocks given the prospect of higher interest rates.
“Typically, growth stocks exhibit higher duration – interest-rate sensitivity – than value stocks. This is consistent with the expectation that a higher proportion of cash flows from growth stocks will be received in the relatively distant future,” he said.
“As a result, growth stock cashflows are more sensitive to changes in interest rates and since 2008, due to the slow pace of economic growth, the prolonged economic recovery and quantitative easing, they have benefitted from low inflation and interest rates.”
Industries
Turning to performance within the FTSE All Share and the best-performing sector of the quarter was oil & gas. This is not too surprising given the strong gains that were seen in the oil price over the past three months.
Only one of the FTSE All Share sub-industries was in negative territory at the end of the second quarter: telecommunications. Within this, BT Group was down 4.26 per cent; the company has unveiled an ambitious restructuring plan to tackle its high cost base and simplify its business model after a challenging period of performance.
Performance of indices over Q2 2018
Source: FE Analytics
When it comes to the performance of individual FTSE 100 companies, Sainsburys made the biggest gains of the quarter thanks to a 37.65 per cent rise. Tesco was also near the top of the table after rising 25.68 per cent.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “The grocery sector has actually held up reasonably well in the storm currently buffeting the UK high street and the strong share price performance of Sainsbury and Tesco reflects a reappraisal of prospects for supermarkets after a tough 2017.
“General retailers have not fared so well in the high street turmoil, but Next investors have had a very pleasing year so far, as the clothing chain has bucked the retail trend and beaten admittedly low expectations.”
Equity funds
In keeping with the strongest performance of US equities, the IA North America sector made the highest average return of the second quarter. Baillie Gifford American was the strongest member of the peer group (and the Investment Association universe as a whole) with a total return of 24.85 per cent.
Morgan Stanley US Growth was up 18.27 per cent, GS US Focused Growth Equity Portfolio made 17.18 per cent and T. Rowe Price US Large Cap Growth Equity gained 17.14 per cent. Some 92 of the sector’s 140 members posted a total return of more than 10 per cent over the three-month period.
Performance of sectors over Q2 2018
Source: FE Analytics
Coming in second place was IA UK All Companies. VT Cape Wrath Focus made the biggest total return here, rising 23.55 per cent; it was followed by Baillie Gifford UK Equity Alpha (up 15.35 per cent), BlackRock UK (up 14.43 per cent) and L&G Growth Trust (up 13.83 per cent).
The weakest average performance came from the IA Global Emerging Markets sector, with Barclays GlobalAccess Emerging Market Equity having the worst quarter after losing 10.31 per cent. Only seven of the sector’s 102 members were in positive territory, led by Lazard Mena’s 8.73 per cent gain.
Bond funds
In the Investment Association’s fixed income peer groups, IA Global Bonds was the clear winner as its average member posted a 1.27 per cent total return during the second quarter of the year.
Pictet US High Yield made the largest return over the three months, gaining 8.14 per cent. MFS Meridian Inflation-Adjusted Bond came in second place after making 7.68 per cent, followed by MFS Meridian US Government Bond and Lord Abbett Short Duration Income – which were both up 7.14 per cent.
Performance of sectors over Q2 2018
Source: FE Analytics
The only other fixed income sector to make a positive return, on average, in the quarter was IA UK Gilts. Schroder Gilt & Fixed Interest made 0.54 per cent, the sector’s highest quarterly return; Allianz Gilt Yield was up 0.51 per cent while iShares Over 15 Years Gilts Index (UK) made 0.48 per cent.
IA Global Emerging Markets Bond was the weakest performance by a significant margin, with the average fund dropping more than 2.5 per cent. GAM Multibond Emerging Markets Inflation Linked Bond is at the bottom of the table after falling 12.56 per cent but Fidelity Emerging Market Debt sits at the top after making 9.12 per cent.
Multi-asset and specialist funds
As the chart below shows, the IA Technology & Telecommunications sector was the best performing specialist peer group by quite a margin during the second quarter. The average fund here was up by 12.28 per cent.
MFM Techinvest Technology made the most over the three-month period, gaining 21.29 per cent, while Neptune Global Technology was up 16.61 per cent and AXA Framlington Global Technology made 16.18 per cent.
Performance of sectors over Q2 2018
Source: FE Analytics
The only multi-asset or specialist sector to post an average loss was IA Targeted Absolute Return. City Financial Absolute Equity, which is one of the more high-risk members of the peer group comes in last place after falling 21.76 per cent.
LF Odey Absolute Return had a stronger quarter after gaining 8.56 per cent while Polar Capital UK Absolute Equity made 6.37 per cent and WAY Absolute Return Portfolio rose 4.56 per cent.