Curmi & Partners

Quarterly Update and Outlook

Q1 2018

Equity

The first quarter of the year was characterised by heightened volatility, with most indices ending the quarter recording losses despite elevated investor expectations at the start of the year. Equities had a strong rally in January, however, sentiment turned sharply in February, with all indices reversing the January gains and closing the month in the red. The performance recovered slightly in March, but not enough to cancel the February losses.

The sell-off was indiscriminate affecting all sectors and asset classes and was triggered by a number of factors including:

  • Concerns about the future interest path for the United States and more specifically whether the US economy could sustain interest rates rising at a faster rate than expected. These concerns were driven by better than expected January employment numbers alongside early signs of a tighter labour market;
  • The US 10 year yield rising to circa 2.8% from the 2.3% yield at the end of 2017, adding pressure to the Equity Risk Premium. It also raises the risk free rate which is used to discount future cash flows leading to lower present value which makes stocks look more expensive;
  • Rising bond yields could have negative impacts on the overall macroeconomic prospects, while also increasing interest payments for companies that finance growth through the debt market;
  • Geopolitics, particularly the potential trade war between US and China and the recent conflict in Syria;

The weakening in the equity market has largely been driven by investor uncertainty as a result of the factors mentioned above. All indices are still trading on a PE that is higher than the median PE, which is calculated over the period 2006 till 2008. Although valuations remain inflated compared to history they are more reasonable today than they were at the end of 2017.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.