1 Issue 97 | April 2019

the tortoise & the hare

| Q1 2019 Economic Overview

Summary

The US economy continues to grow steadily, at a 3% annual growth rate as at the end of 2018, despite easing in the final quarter. Meanwhile, inflation increased by only 1.5%, its smallest increase since 2016. The US Federal Reserve expects to maintain interest rates at 2.5% for the rest of 2019 and even intends to stop quantitative tightening. 10y US treasury bonds currently offer a yield of 2.44%. Over the last three months, the US Dollar strengthened against both the Euro (1.5%) and the Yen (1.3%) but weakened slightly against the British Pound (-2.6%).

In the UK, having passed the original Brexit deadline, for now, things remain the same. Economic growth continues to be positive, at 1.4%, though the growth rate for the last quarter was a meagre 0.2%. The inflation rate dropped below the 2% Bank of England (BoE) target, to 1.9%. Interest rates remained at 0.75% last quarter, and the latest yield on offer for a 10y gilt is 1.01%.

In comparison, the European Central Bank (ECB) maintained a 0% interest rate. German 10y bond yields have dropped back into negative territory. The Eurozone annual GDP growth rate is now at 1.1%, having been dragged down by the German and Italian numbers, where any signs of growth evaporated in the latter half of last year. Inflation is currently not an issue with a 1.4% year over year increase.

Japan continues to grow, but at a rate of just 0.3%. Inflation is just about positive at 0.2%. The Bank of Japan (BoJ) interest has now been kept at -0.1% for 2 years. The BoJ is still buying ETFs and Japanese REITs above and beyond Japanese government bonds.

Seemingly undeterred, China maintained an annual growth rate of 6.4%, however, this is its weakest growth rate in 28 years.

Fixed Income

Fixed income had a strong start to the year. Higher risk market segments like high yield, emerging market debt and even US investment grade credit, each returned more than 6% in Q1. Developed markets government bonds in local currency terms gained 2.33% over these 3 months, or 1.74% in US Dollar.

Equities

Equity markets globally performed well, with USD based returns for the MSCI ACWI index reaching 12.18% for Q1. For the same period, returns in US equities were around 13.6%, while prices in emerging markets increased by 9.9%, and the rest of the developed equity markets by approximately 10.4%. Currency returns had very little impact last quarter.

2 Issue 97 | April 2019

Q1 2019 Economic Overview

Value stocks performed slightly worse than the respective broad markets in all 3 regions. In the US, investors made about 11.9%, in developed markets ex US 8.5% and in emerging markets 7.8%. US small cap stocks on the other hand beat the S&P 500 returns with an increase of 14.6%. In the rest of the developed markets, returns were in line for small cap, and in emerging markets small cap returned only ~7.8%.

Real Assets and Total Return

Oil prices made a comeback in Q1, shooting up c.30% and pulling the broad Bloomberg Commodity index up 6.3%. Gold prices registered just a small increase of 1.3%. Global REITs performed broadly in line with equity markets, returning 14.4% for the quarter.

The Credit Suisse Managed Futures Liquid index lost 3.3% from the start of the year, having recovered 2.2% in March after a bad month in January, when returns suffered from short term price reversals in both currencies and equities. The SG Multi Alternative Risk Premia index is up c.2.8% for the year and our fixed income total return fund added about 1.9% in the first quarter.

Sources:

Morningstar for index data, FT.com for foreign exchange and yield data, Yahoo Finance for VIX data, Trading Economics for economic data, all as of 31st March 2019

Q1 2019 Economic Overview

Quarterly Indicators

* % of GDP 2018 estimate** change on 1 year ago

Source: Trading Economics (31st March 2019) Source: Trading Economics (31st March 2019)

Source: Trading Economics (31st March 2019)Source: FT.com (31st March 2019)

* Quarter % Change from 31/12/2018 to 31/12/2019** YTD % Change from 31/12/2018 to 31/03/2019

Source: Morningstar (31st March 2019)

Source: Yahoo Finance (31st March 2019)

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