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LCP Investment Summary - December 2017

Posted on 2 January, 2018 by Administrator

LCP Investment Summary - December 2017

Global equities rose 0.9% (in € terms) during December, and 9.0% for 2017.

Eurozone equities fell 0.7% in December with some continuation of the profit-taking seen in November and with little new positive news to support them. But they rose 13.9% for the year, their best year since 2013 driven by solid economic growth, strong company earnings and also no major political dramas.

North American equities rose 1.1% in $ terms (0.6% in € terms) in December, again hitting all-time highs. President Trump got his long-awaited tax plan approved by through Congress, which encouraged investors in relation to the proposed $1tn infrastructure spending bill due in 2018. As expected, the Federal Reserve increased interest rates in December but left its rate outlook unchanged for 2018 and beyond.

Bonds

Longer-dated eurozone bond prices fell 1.1% in December, with the yield on the AAA Eurozone 15+ Year Index rising to 1.08% by month end. The Euro Broad Sovereign 10+ Year Index fell 1.7% with its yield rising to 1.69%.

Yields rose mid-month after Germany announced plans to borrow more money from investors in 2018 than 2017 as it will have to pay back more old debt than it repaid in 2017. Improving eurozone economic data was also a negative for longer-dated bonds.

Sample DB Scheme

The funding level of our sample DB scheme rose to 97.9%, as its assets were flat and its liabilities (calculated using a MFS proxy) fell over the month.

Sample DC Schemes

The High and Medium Risk Strategies rose in December but the Pension Purchase Strategy fell due to its high allocation to longer-dated eurozone government bonds.

Overview of performance during Q4 2017 

Global equities rose 4.2% (in € terms) in Q4 with markets continuing to move higher on both improving economic and corporate earnings growth. Markets returned 9.0% (in € terms) for 2017 which was well below the local-currency (€ hedged) return of 20.3% due to the strength of the euro particularly against the US$.

European equities fell 0.3% in Quarter 4, after markets hit five month highs during October following the release of improving eurozone economic data which continued to provide a solid backdrop for investors. Positive Q3 corporate earnings, which were released in October, resulted in strong market gains but were followed by investors taking profits over November and December.

The continuing strength of the euro also dampened sentiment due to the number of large exporters in the eurozone region. Despite this slowdown in Q4, Eurozone equities had their best year since 2013, rising by 13.9%.

North American equities rose 6.5% in $ terms (4.8% in € terms) in Q4, boosted by both positive economic data and Q3 corporate earnings released in October which reassured investors despite markets hitting all-time highs. Markets continued to hit record highs in November and December with the Dow Jones Index breaking 24,000. Investors also grew more optimistic about the prospects for President Trump’s tax reform plan and despite the Senate delaying a vote on 30th November, it was eventually passed just before Christmas.

The US Federal Reserve raised interest rates as expected in December, stating that rates will rise further during 2018 reflecting the on-going improvement in the US economy which is a positive for equity investors. US equities were up 21.4% in $ terms for 2017 but only 7.0% in € terms due to the weakness of the dollar against the euro over the year.   

Emerging Markets equities rose 5.7% in local currencies (5.3% in € terms) over the quarter. The continuing improvement in global economic growth is a positive for emerging market exporters, as well as the weaker US$. The market return for 2017 in local currencies was 31.0% but only 16.4% in € terms.

Bond Performance

Longer-dated eurozone bond prices rose 0.8% over the quarter, with the yield on the AAA Eurozone 15+ Year Index falling to 1.08% by the end of December. 

Longer-dated yields fell in October, despite the improving economic data, after the ECB announced that it would extend its asset purchase programme until at least September 2018 and will continue its bond-buying scheme beyond its scheduled end date of December 2017, but cutting monthly purchases from €60bn to €30bn from January 2018. 

Yields rose in mid-November on the back of improving economic data but then fell back by month end as a result of the release of weaker-than-expected eurozone inflation data. December saw yields rising mid-month after Germany announced plans to borrow more money from investors in 2018 than 2017 as it will have to pay back more old debt than it repaid in 2017.

For 2017, longer-dated eurozone government bond prices fell by 3.3%.

Market Performance to 31st December 2017

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