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Four picks for investors following last week

Equities and bonds strengthened worldwide, but the dollar weakened because of the Fed’s more dovish tone on future rate rises. Whilst now at 1%, there is the suggestion another two rate rises will happen in 2017, this is still below some of the market’s more fearful projections.

Following last week: The market at a glance

Equities and bonds strengthened worldwide, but the dollar weakened because of the Fed’s more dovish tone on future rate rises. Whilst now at 1%, there is the suggestion another two rate rises will happen in 2017, this is still below some of the market’s more fearful projections.

The defeat of the Freedom Party eased concerns of a populist uprising in Europe; representing important sentiment ahead of next month’s French elections. However, success by French right-wing candidate Marine Le Pen cannot be ruled out. As such, caution may return to the financial markets and European bond yield spreads may widen again.

Emerging markets reacted particularly strongly to these developments, benefiting from renewed risk appetite. Emerging market equities have outpaced developed market equities year to date, with a total return of nearly 12% in US dollars.

Earlier in the week, the UK bill to start Brexit negotiations was given Royal Assent, which allows Prime Minister Theresa May the go-ahead to trigger Article 50. This was anticipated and, together with a majority vote to leave UK base rates unchanged, did not have any market impact.

Through all of this, volatility as measured by VIX remained very low and performance differential between different parts of the equity and bond markets was muted.

Nevertheless, uncertainties still exist, not least in politics, but also with delivery on President Donald Trump’s policy promises, oil price volatility, and Chinese action on currencies and market regulation. China has been quiet for some time but remains high on any black swan index.

In this environment, investors will likely seek defensive investment options within each asset class.

Sector performance: A mixed picture

Three picks for investors: US Financials, US Materials, and Global Technology

Over the past few weeks there was no clear sector leadership, with a mixed picture for the top and bottom sector performers. US Materials led the pack and, despite the Fed rate hike, Financials in Europe had a strong run, interesting given defensive positioning in recent weeks ahead of the Dutch elections. De-regulation remains topical for Financials as the tone is shifting to be less onerous, which may also benefit the sector.

On a global level, Technology continues to post strong gains as the earnings and growth outlook improves. The weakness in crude oil has weighed on the Energy sector, and was a notable laggard across the regions.

Defensives outperform: But only slightly

Investors beware of: Momentum-style investing

More defensive investment styles performed slightly better than the general market, reflecting investor caution. Whilst year to date, momentum-style investing saw (essentially buying stocks that have risen in the recent past) the highest return the dangers of sharp reversal should be kept in mind.

Fixed income markets gain post Fed hike

One pick for investors: Emerging market debt local currency

The Fed’s current rate outlook appears positive for local currency bonds.

US Treasuries rallied following last week’s announcement, helping all investment grade benchmark performance. In parallel, peripheral and core spreads tightened in the wake of the Dutch election results, bolstering the returns of the euro treasury index.

Emerging market debt local currency could serve as a continued source of return, especially given that US 10-year yields remain in check.

Antoine Lesné , March 27

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