With 2016 proving to be a challenging year for investors, most started 2017 wondered whether trends such as rising commodity prices, value’s resurgence and political surprises would continue for the foreseeable future. 
The start of this year has seen the FTSE 100 reach record highs, inflation climb past the Bank of England’s 2 per cent target and the Dutch elections prompt relief after being won by prime minister Mark Rutte's centre-right VVD party.
While three months is a short time frame in which to view investment performance, we have pulled together a series of charts showing how 2017’s first quarter panned out from viewpoints.
Over the following pages, we find out what happened in markets when it comes to asset classes, geographical regions, investment styles, fund sectors, market capitalisation and FTSE industries, as well as the expert’s outlooks from here.
Asset classes
Source: FE Analytics
Gold was the big winner over the opening three months of the year, with the S&P GSCI Gold Spot index rising by close to 7 per cent. The yellow metal ended March at $1,244.85. Its price had fallen over the previous quarter but it rallied at the start of 2017 on the back of increased political risk. ETF Securities’ Joshpreet Tiwana said: “Political transition in the UK, Netherlands, France and Germany all pose considerable tail risks to investors in the form of a potential breakup of the EU and stagflation in the UK. This underlying dynamic has supported the performance of the safe haven metal so far this year and will likely continue to do so. Inaccurate polling from recent votes (UK general election, UK EU membership referendum and US presidential election) makes these events more uncertain for European investors and supports the case for a portfolio allocation to gold, the traditional ‘safe haven’. However, the UK’s exposure to political risks means that gold’s ‘safe haven’ performance could be hampered for GBP-based investors by currency movements, something that can be mitigated through a currency hedged exposure.”
Geographies
Source: FE Analytics
As we saw on the previous slide, the MSCI AC World index posted a 5.64 per cent total return in the first quarter. Looking more closely at geographical performance, emerging market equities and European equities had a strong three months thanks to renewed confidence in the global economy and the prospect of reflation. Guy Miller, head of macroeconomics and chief market strategist of Zurich, said: “Both emerging markets and the eurozone have underperformed the US equity market for a number of years, but in the past month or two they have performed better on a relative basis, and we may now be entering a phase where these equity markets outperform relative to the US. This is often the case in the late stage of an economic cycle when ‘high beta’ markets are doing better. Indeed, the combination of improving macro and earnings fundamentals in markets where investors have been underweight or neutral for a long time can be a potent mix for outperformance.”
Investment style
Source: FE Analytics
Last year witnessed the outperformance of the value investing style, following a number of years when it lagged quality and growth. Many fund managers are expecting value to outperform quality/growth in the future as this style tends to do better in a reflationary environment. However, value underperformed in 2017’s opening quarter with the MSCI AC World Value up 3.62 per cent; MSCI AC World Growth gained 7.79 per cent while MSCI AC World Quality rose 7.44 per cent. Nonetheless, those expecting a value revival argue that the rotation is likely to be piecemeal and say that value should not be expected to outperform in every quarter. JP Morgan Asset Management fund manager Ian Butler expects value to lead the market as inflation expectations begin to rise and interest rates increase: “Historically the value style has outperformed in periods of rising inflation and we believe that this relationship remains valid today. If you believe that there is a degree of cyclicality to the value and growth investing styles, as we do, there is good reason to believe that value is finally punching back – and maybe just getting started.”
Equity funds
Source: FE Analytics
In keeping with emerging markets being the strongest equity region, the IA Asia Pacific ex Japan and IA China/Greater China sectors were the quarter’s strongest performers – with both boasting an 11.59 per cent average total return over the three-month period. Old Mutual Asia Pacific, Waverton Asia Pacific and Invesco Perpetual Asian were the strongest performers from the former peer group, while Guinness Best of China, GAM Star China Equity and Baillie Gifford Greater China lead the latter. The IA Global Emerging Markets sector wasn’t far behind with an 11.03 per cent total return, with Baillie Gifford Emerging Markets Growth, Baillie Gifford Emerging Markets Leading Companies and BMO LGM Global Emerging Markets Growth and Income leading the pack here. The worst average performance numbers of the quarter came from the IA UK Equity Income sector, which made just 4.22 per cent, followed by IA Japan (up 4.26 per cent) and IA UK All Companies (up 4.53 per cent).
Bond funds
Source: FE Analytics
Fixed income is another area where emerging markets were the clear leaders after the average funds in the IA Global Emerging Markets Bond sector posted a 4.75 per cent total return; the second-best sector – IA Sterling Strategic Bond – made only 1.95 per cent. Natixis Loomis Sayles Emerging Debt & Currencies made the highest return at 8.16 per cent, while JB BF Emerging Markets Inflation Linked gained 7.80 per cent and Baillie Gifford Emerging Markets Bond was up 7.57 per cent. Sergio Trigo Paz, the head of BlackRock’s emerging markets debt team, said: “We see emerging market debt as uniquely positioned to receive global investment flows out of lower yielding fixed income assets that could generate negative returns due to monetary policy normalisation. Emerging market debt spreads help serve as a buffer to eventually higher developed market rates. History shows emerging market debt can perform well in a reflationary world as long as its fundamentals are strong. Emerging market growth is accelerating, and we expect more improvements to come this year amid an apparent stabilisation in China’s economic growth trajectory and robust commodity price gains.”
Multi-asset and specialist funds
Source: FE Analytics
Investors having an eye on a reflationary trend in the global economy is also evident in the performance of the IA Technology & Telecommunications sector in the first quarter. This peer group, which has a focus on the more cyclical technology sector, made a 10.68 per cent average return over the three months. Joshua Spencer’s T. Rowe Price Global Technology Equity was the strongest performer here with a 15.88 per cent return, followed by Polar Capital Global Technology (up 14.92 per cent) and GAM Star Technology (up 13.65 per cent). Spencer said: “We believe technology is one area able to drive its own growth through innovation, new products, and product cycles as well as market share gains. In a low-growth world, this is where the growth can be found. Bearing this world view in mind, we have a preference for the faster-growing companies. Overall, most industries and individual companies are going to find it difficult to achieve much expansion over the next decade if you accept, as we do, that macroeconomic growth is likely to be modest. We are seeing this in Europe and the US – even China has slowed down. There are limited prospects for this situation to change dramatically – technology has the potential to be an oasis of growth in a global economy that lacks it.”
UK market-cap
Source: FE Analytics
When it comes to UK market caps, AIM stocks led the way (the index was up 10.45 per cent) while both the FTSE Small Cap and FTSE 250 made a total return in excess of 5 per cent. The FTSE 100, which had a strong 2016 after investors favoured internationally facing large-caps) lagged with a 3.65 per cent total return. CF Miton UK Smaller Companies managers Gervais Williams and Martin Turner highlight the positive economic data coming out of the UK, despite the country’s vote to quit the EU, as reason for renewed investor optimism in smaller companies. “The UK economy could further surprise in its resilience,” they added. “If this were the case then the current outperformance of UK quoted small- and micro-cap stocks could continue.”
UK industries
Source: FE Analytics
On an industry level, consumer goods stocks were the standout leaders in the UK market during the first quarter. The FTSE All Share Consumer Goods index was up 12.83 per cent across the three-month period. This sub-sector is home to some of the most popular stocks in the UK market, including the likes of Unilever, Imperial Brands, British American Tobacco and Diageo. Only two areas of the UK market posted losses in 2017’s first quarter – oil & gas, which fell 6.47 per cent on the back of oil price weakness, and telecommunications, down 6.47 per cent.