As we approach the second half of the year, we might readily conclude that 2018 will be looked back on as a turbulent year for equity and bond markets.
After hitting record highs in January, global equity markets slumped into correction territory in February and March. Investors rushed for the exits amid growing fears following a bond market rout.
This was triggered by early signs of rising inflation in the US on the back of accelerating economic growth and wages rising after years of stagnation.
Yields on US government bonds, which rise as prices fall, subsequently hit their highest level since January 2014, with the benchmark 10-year yield climbing above the symbolic psychological threshold of 3 per cent.
Investors were confused by the messages sent from financial markets. In the year to date, there have been seven days when global bond and equity markets, which traditionally move in opposite directions, fell simultaneously.
Facebook and other Faang shares faced pressure after reports that Cambridge Analytica, a data analysis company employed by President Donald Trump’s election campaign, mined the personal data of 50m Facebook users.Investors could not rely on another key feature of markets in 2017 as evidence emerged of a rotation out of technology stocks towards banks and energy names.
But did this actually happen? Have we experienced a market rotation or have our perceptions been tainted by the sell-off earlier this year?
Let us start with the technology sector. Allocation to the so-called Faang (Facebook, Apple, Amazon, Netflix and Alphabet’s Google)stocks was a big driver of performance in 2017, in addition to Chinese names such as Tencent and Alibaba.
This group of big technology companies suffered their worst sell-off in February in response to fears over tighter regulation and other big setbacks for these companies that make use of so much of our personal data.
Facebook and other Faang shares faced pressure after reports that Cambridge Analytica, a data analysis company employed by President Donald Trump’s election campaign, mined the personal data of 50m Facebook users.
This triggered a repricing of their growth potential over the long term, with such scandals strengthening calls for regulators to diminish their dominance.
However, these fears were short-lived as those five stocks have all outperformed the S&P 500 index in the year to date (as of 8 June).
So far this year, Netflix is up 58 per cent and Amazon 29 per cent, while the US equity benchmark has returned only 1.58 per cent in US dollar terms.
Although investors might be more sceptical about their long-term growth potential, they took comfort from strong quarterly earnings statements. Several Wall Street analysts admitted they had made a bad call by predicting an iPhone slowdown.
Apple also pleased the market by launching a $100bn (£74bn) buyback program and lifting its dividend.
Netflix announced that it has an impressive 125m subscribers in total and revenue growth of 40 per cent, the fastest quarterly year-on-year increase it has posted since introducing its online streaming service. So, the technology rally is far from over. It seems that what goes around does indeed come around.
On this side of the Atlantic, things have not changed that much since the EU referendum in June 2016.
Source: FE Analytics
The main UK equity benchmark, the FTSE 100 index, is full of commodity-related names which have benefited from the surge in oil prices this year. Meanwhile, a strengthening US dollar has helped commodities, as they are all priced in the reserve currency.
The oil price was further helped by soaring US supplies and concerns that the US would scrap the Iran nuclear deal and reimpose heavy sanctions on the Opec member.
With the rise of commodity prices and the US dollar, mid-cap managers might have been expected to suffer this year.
This has not been the case, with the UK mid-cap FTSE 250 index continuing to outperform the large-cap FTSE 100.
The mid-cap benchmark has risen by 3.34 per cent in 2018, outperforming the FTSE 100 index by 1.3 per cent, as such, it has now fully reversed its losses from the Brexit vote.
The strong performance of the FTSE 250 has been driven by strong corporate activity this year. For example, the best performance came from Ocado. Its share price rose by 45 per cent after the online retailer reached an agreement with Kroger, the second-biggest food retailer in the US.
The lesson is: never give up on the mid-caps.
Charles Younes is research manager of FE
