The quarter comes to an end, global equity prices are up circa 8% year to date, the FTSE 100 closer to 3% in absolute terms. Twelve months ago, sentiment for equities, despite concerns over Brexit and the possibility of a Trump victory was on the upswing. Commodity prices were rising, economic indicators were improving and after a disappointing start to the year. The second quarter of 2016 heralded the start of a strong rally in equity prices. The year finished on a positive note, the UK economy had weathered the Brexit vote, Donald Trump had raised expectations of a series of stimulus packages to help the US economy. This fed into the start of 2017, the Federal Reserve was expected to start to normalise interest rates on the back of the stronger US economy. The economy in Europe was finally looking as if it was in recovery mode and concerns that the Chinese economy may be slowing had rescinded.
As the year has worn on, equities have remained resilient, as expectations remain that the global economy will grow circa 3% this year, however, the sentiment is more cautious. The Trump bump, as it became known, has withered as Mr Trump has failed to bring others along with him. The UK economy has slowed and the result of the General Election appears to have impacted consumer confidence in the UK. The Federal Reserve has stuck to their task of raising interest rates twice this year despite the economic data from the region failing to meet expectations. Concerns reappear that the monetary tightening in China may have an impact. On a more positive note the European economy has grown and met expectations, Mario Draghi now seems more confident that the eurozone economy is on a firmer footing.
Bond markets continue to tell a picture that suggests any recent rise in inflation expectations are temporary and that the global economy remains in a low growth low inflation environment. Hopes that the oil price will stabilise around $60 a barrel has faded as US shale gas production increased and oil supply remains abundant despite OPEC production cuts. Commodity prices overall have fallen in the first half of 2017, giving back most of the gains made in the first half of 2016. This is despite a weaker US dollar. Equity prices remain close to all-time highs; however, one gets the sense the optimism of 12 months is not quite.
On another aside the FCA reported on investment manager fees, highlighting that the average fee paid has not fallen in 10 years. One of the problems for the Financial Services industry overall is the increased level of regulation, Mifid 2 comes to mind. Compliance departments are increasing to manage the situation. Mifid 2 will add to the burden and increase costs for many boutiques, who can offer more competitive fee structures and often better performance as well. However, the continual increase in the regulatory burden will force them away, pushing investors back to the big players who will be free to keep fees high.