Six Month Letter – Global Investment Overview

European Union

European equities have had quite a positive run in the first half of the year as a result of reduced political risk, a positive economic backdrop and improved corporate earnings. The Euro First 300 gained 4.4 per cent, Euro Stoxx 50 rose by 4.6 per cent, in France, the CAC 40 advanced by 5.3 per cent, while the GermanDAX index soared by 7.4 per cent.

In the first quarter, the European Central Bank (ECB) upgraded its 2017 and 2018 growth and inflation forecasts but pledged to keep existing stimulus in place until the end of 2017. However, the final week of the second quarter witnessed a pullback in Eurozone equity prices as very positive remarks made by ECB President Mario Draghi were interpreted to mean that the economic stimulus measures might soon be halted. Annual inflation dipped to 1.3 per cent in June from 1.4 per cent in May,but ECB President Draghi commented that the threat of deflation is over.

Political risk was one of the main focus points this year as the French presidential elections approached. However, centrist and pro-EU candidate Emmanuel Macron won a convincing victory and his new party also won a significant proportion of seats in the legislative elections. Markets responded positively as this should enable him to push through his reform agenda, which should in turn diminish the risk of a Eurozone break-up.

In June, Greece’s creditors agreed to unlock over €8.5 billion in financing for the country, removing a possible summer default on loan repayments. 

 Meanwhile, Gross Domestic Product (GDP) growth of 1.9per cent(year-on-year)in the Eurozone was stronger than previously estimated in the first quarter, making it the best result in five quarters.  Data for the second quarter suggests that the economy remains ona path of strong growth. The Composite PMI, based on surveys within the manufacturing and services sectors of an economy, indicates expansionary period over the months to come, while unemployment rate continued to fall steadily by end of May, down to 9.3%. Meanwhile, Economic sentiment is sitting near a multi-year high and financial conditions remain extremely accommodative. 

This positivity was reflected on the corporate bond market as European high yield bonds outperformed European investment grade bondsand sovereign debt securities,as investors are now more confident investing in riskier assets, including the more volatile equity asset class.

United States

US equities advanced significantly in the first six months of 2017, namely, the S&P 500 increased by 8.2 per cent, Dow Jones rose by 8 per cent and Nasdaq rallied by a significant 14.1 per cent.  However, surprise slowdown in inflation so far this year is tightening monetary conditions a lot faster than Fed officials anticipated. Consumer prices in the US increased 1.6 per cent year-on-year in June of 2017, below 1.9 per cent in May. It is the lowest inflation rate since October of 2016 due to a 0.4 percent fall in gasoline prices.

The US grew at an annual pace of 2.1per cent in the first three months of the yearwhen compared to the comparable period in 2016. The Fed raised base rates by 25 basis points at the March meeting of its Federal Open Market Committee. In the first quarter, the market remained optimistic about Donald Trump's plans to cut taxes, boost infrastructure spending and reduce the regulatory burden on business. At the June meeting of the Federal Open Market Committee the US central bank raised base rates by a further 25 basis points and set out detailed plans to reduce its balance sheet.

Political uncertainty is still an important feature in the market as President Trump dismissed the FBI director. This raised doubts over the ability of the administration to push its fiscally expansive policies and also weighed on the dollar. The dollar was further negatively impacted amid rising expectations that central banks in other major developed economies are also preparing to tighten monetary policy.

The US treasury yield curve remains considerably flatter compared with last year's close. Short rates through three year maturity have climbed while yields of five years plus have dropped this year. However, investment grade bonds have still managed to close the first half of the year marginally higher. Meanwhile, demand for high yield corporate bonds have remained strong as defaults are down and there is still room for modest spread tightening. Moreover, the weakening dollar helped in buoying advancements across the emerging markets bond segment.

United Kingdom

UK equities registered an overall increase in the first half of 2017 due to strong corporate earnings.However,the second quarter was quite a volatile one amid uncertainty over the political backdrop and the future path of monetary policy. The FTSE 100 gained 2.4 per cent and the FTSE 250 mid-index rallied by seven per cent by the end of June.

The UK expanded by 2 per cent in the first quarter (year-on-year) – in line with forecasts, and slightly lower than the initial estimate reading of 2.1%. Meanwhile, inflation continiued to trend higher over the six-month period, as the weakening Sterling following the Brexit vote a year ago resulted in higher prices of imported goods and services, driven by cost of games, toys, holidays abroad, food, clothing and electricity.

Domestic cyclical areas of the market and the sterling performed well after the UK prime minster Theresa May called the snap general election for June 8th. At the time it was widely anticipated that the Conservatives would strengthen their majority, putting them on a stronger footing before the start of Brexit negotiations.

UK equities then performed very well over May, led by large caps which rallied amid sterling weakness and a rotation back towards defensive sectors and away from cyclicals. This occurred as concerns around the global economic outlook increased, with mixed economic data out of the Chinese and US economies.

Many of the gains in May were undone in June. UK domestic cyclicals performed poorly as the polls narrowed ahead of the UK general election and sterling weakened further as a hung parliament materialised. An increasingly uncertain outlook for consumer spending also weighed on UK-focused sectors. Meanwhile, defensives reversed some of their gains of the previous month as long-dated government bond yields recovered on the back of comments from ECB Governor Mario Draghi and Bank of England Governor Mark Carney.

Emerging Economies

EM equities outperformed their developed-market counterparts for the sixth consecutive month in June, with the MSCI EM Index returning double-digit gains on a year-to-date basis, as opposed to single-digit gains registered inthe MCSI World Index. For the second quarter of 2017, the MSCI EM Index was up 6.4 per cent, while the MSCI World Index was up 4.2 per cent. Key drivers of emerging market performance included encouraging economic data in China, investor inflows and corporate earnings growth.

Commodity prices declined during the second quarter despite a late-June rally. West Texas Intermediate (WTI) crude oil spot prices declined 9 per cent during the second quarter. At the end of June, however, oil prices recorded their strongest rally of 2017 after US producers appeared to curtail their drilling activity and government data showed a sharp drop in US gasoline supplies as summer demand picked up.

Malta

The MSE index increased by 1.4 per cent in the first half of 2017. Top performers included Santumas Shareholdings plc, PG plc (newly issued in May) and Simonds Farsons Cisk plc shares having registered a 58.7 per cent, 30 per cent and 8.6 per cent rally,respectively. Meanwhile the main fallers were Medserv plc, Tigne Mall plc and GlobalCapital plc shares having stumbled by 18.7 per cent, 17.7 per cent and 17.1 per cent,respectively.

In the local corporate bond market fallers outweighed gainers. The 7.5% Mediterranean Bank plc Subordinated Bonds EUR 2019 was the worst performer having slipped by 6.4 per cent, while the recently issued 4% Eden Finance plc Unsecured € 2027 headed the list of gainers having appreciated by three per cent.

Three new local corporate bond issues were listed on the MSE as at the end of June, with the largest issue being the €65m 4.35% SD Finance Unsecured bond due in 2027. Furthermore, three issues were admitted to Prospects. Prospects, is the market regulated as a Multilateral Trading Facility operated by the MSE,providing a venue for start-up and small to medium-sized enterprises to come to market whether it is for a bond or an equity issue.

In the sovereign debt market yields rose as these followed the same trend witnessed in international markets. In fact, all Malta Government Stocks (MGS) registered a decline in their closing price. The 3% MGS 2040 (I) r recorded the highest loss, having declined by 5.9 per cent.

What Lies Ahead

As the central banks gradually reverse their policies and their aggregate balance sheet goes from expansion to contraction, asset classes might all be quite volatile in the coming months. The price of crude oil will most likely remain in the headlines, however political and economic upheaval in a major oil-producing country like Venezuela could cause a price spike.

As stated in previous correspondence, we recommend that investors seek different asset classes to form part of their portfolio. Diversification will ensue that the overall value of one's portfolio will not be severely hit if one asset class registers a detrimental drop. Hence, investing in different asset classes will help protect one's portfolio valueand level of volatility. In the first quarter of 2017, two new sub- fund of the Merill SICAV were launched, namely the Merill High Income Fund and the Merill Global Equity Income Fund. Jesmond Mizzi acts as advisor and promoter to the Funds and the aim of these sub-funds is   to provide clients with a more active management style while investing in different asset classes and hence providing for adequate diversification.

Since thelaunch oftwo new Merill sub-funds last April –assets under management in the Merill High Income Fund and the Merill Global Equity Income Fund, have reached€13.9 million and €5.7 million, respectively. Moreover, the Merill Total Return Income sub-fund, launched in February 2016, has a total of €25million in assets under management.