The stop-start year for financial markets continued in March, with all major equity indices registering falls in the month.
February's sell-off was triggered by strong wage growth figures in the US and the impact of further US interest rate rises. In March, markets were spooked by fears of a global trade war as the US administration first announced tariffs on steel and aluminium imports, and then singled out China with a proposed 25% tariff on $50bn worth of Chinese imports. China has replied with its own set of proposals to levy penalties of the same rate on 106 types of US goods.
Clearly, protectionist policies like these are a hindrance rather than help to global growth prospects. However, it is important to put the events in context. Firstly, the proposed tariffs on Chinese goods amount to only about 0.1% of Chinese GDP. Also, these are the first forays in what could be a long and protracted negotiating process, and it will take many steps before a full-blown trade war between the two takes place.
For equity markets, the result was a 4.2% loss for the S&P 500, a 3.6% loss for emerging market equities, while the FTSE All Share fared better, falling just 1.8%. However, it was a strong sterling that led to the better returns from our home market, and regional equity returns in local currency were all around 2% down.
Fixed income markets held up better, and UK gilts provided the best returns for sterling investors, rising 2.1%.
In terms of outlook, rather than trying to second guess the wills of the Chinese and American administrations, we prefer to focus on fundamentals and the two key drivers of financial markets over the past few years - reasonable economic growth and accommodative monetary policy remain in place. Also, forward-looking indicators, like PMI manufacturing surveys, are holding up well.
Finally, valuations are now more attractive than they were at the start of the year. The US equity market is now trading on a forward P/E of 17x, emerging markets 12x and UK equities 13x. These are reasonable given the market backdrop described above.
Guy Myles Chairman, Flying Colours Investment Committee