The sustained uptrend in the global equity markets came to an end in late January, with the most severe correction in years. The sell-off was prompted by fears that the US Federal Reserve could raise interest rates faster than previously anticipated. This is because rising interest rates increase the capital expenditure of companies and can have a negative impact on share prices. Concerns about a trade dispute between the USA and China, as well as negative news from various IT companies (e.g. the data scandal at Facebook), weighed on global equity markets. The volatility (risk) on the equity markets increased significantly again for the first time in a long while. Despite uncertainties on the equity markets, economists forecast continued growth in the global economy for 2018.
Business and consumer confidence remained high in the USA. In February, the manufacturing purchasing managers' index climbed to its highest level since 2004, pointing to a continuation of the solid growth trend in the US economy. Inflation concerns at the beginning of the year eased toward the end of the quarter, partly because wage growth weakened in February. As expected, the US Federal Reserve raised the prime rate target range by 0.25 percent to 1.5 to 1.75 percent and projected two further rate hikes for 2018. Despite the positive economic situation, the equity market saw further sell-offs due to investor concerns about an imminent trade war between the USA and China. Although economists do not expect the situation to escalate significantly, the risks have increased and could adversely affect the economic climate if uncertainty persists.
Measured by the Eurozone purchasing managers' index, business confidence fell sharply in March, having already fallen in February. It should, however, be noted that business confidence has fallen from an exceptionally high level and still corresponds to the sound economic growth in the Eurozone. In fact, the ECB indicated that it is now focusing on when and at what pace it will raise interest rates in 2019. The populists performed better than expected in the elections in Italy. But since a coalition will have to be formed, this will curb extremist policies.
At the end of March, the KOF Swiss Economic Institute raised the economic forecast for the Swiss economy. The KOF economists now anticipate GDP growth of 2.5 percent (previously 2.3 percent). As expected, the SNB maintained its monetary policy stance in March. It reiterated that the franc is still overvalued and the situation in the foreign exchange market remains fragile.
Portfolio return (first quarter)
The good start to the year was short-lived, with February pushing overall performance into negative territory at -1.21 percent, following a positive January (+0.42 percent). The small positive contribution in March (0.06 percent) resulted in an overall gain of 0.74 percent for the first quarter.