French presidential hopeful Emmanuel Macron sent a wave of relief through global markets in April after gliding through the first round of voting in the French election, raising the chances of him beating far right leader Marine Le Pen. Banking stocks in particular rose on the expectation of business-friendly policies from the potential new leader.
And although the possibility that Madame Le Pen may still win is keeping a lid on European gains, the result of the first round of the French election and prospect of tax reform propelled US indices upwards. The US market is also being powered by investors flooding back into technology stocks amid a bumper crop of results from this sector.
Investors are also betting on a profit boost to tech stocks from US tax reforms proposed by President Trump.
However, mining and resources companies, which soared back to strength in 2016 after clambering out of a punishing five-year bear market, are no longer riding high. Anglo American (AAL) was the best performing stock in the FTSE 100 index last year, but its shares have fallen by 20 per cent since the FTSE All-Share Mining index reached a two-and-a-half-year high in February. In the 2016 calendar year the FTSE All-Share Mining index returned 106.3 per cent, but over the past three months it has fallen 10.2 per cent.
China has much to do with that. Chinese data, which many take with a hefty pinch of salt, suggests gross domestic product (GDP) growth of 6.9 per cent in the first quarter (Q1) of 2017, which would be the highest since Q4 2015. But the People's Bank of China is tightening up on credit growth and lending, which could affect demand for commodities.
Smaller companies, massive returns
The Association of Investment Companies (AIC) Global Smaller Companies sector average was 8.7 per cent over one month to 2 May 2017, according to FE Trustnet, and the Investment Association (IA) UK Smaller Companies sector average return was 5.5 per cent. IA European Smaller Companies funds also did well, with a sector average return of 4.06 per cent over one month to 2 May.
Smaller companies, particularly those in the UK, were punished in the wake of the UK's vote to leave the European Union, making them far cheaper than their large-cap counterparts. But Adrian Lowcock, investment director at Architas, says: "The performance in small-caps began to improve following the election of Donald Trump in the US. At the same time, the UK and indeed other developed market economies have been doing much better than expected, giving investors the boost of confidence often needed to encourage investment in smaller companies. The weak pound also makes UK smaller companies more attractive to overseas investors, as well as boosting any international earnings."
Top-performing funds include FP Octopus UK Micro Cap Growth (GB00BYQ7HN43) and M&G Smaller Companies (GB00B75DFL82), which have both returned more than 8 per cent over one month to 2 May 2017. Among investment trusts, BlackRock Smaller Companies Trust (BRSC) and Aberdeen Smaller Companies Income Trust (ASCI) returned 12.4 per cent over that period.
European and UK equity funds also did well. IA Europe ex UK was the third best-performing sector over one month to 2 May, followed by IA UK All Companies, with IA Europe including UK in fifth place.
There was a similar trend among investment trusts, with European Smaller Companies, UK Smaller Companies and Property - Direct Europe among the top-performing AIC sectors.
But the main issue for investors is whether that trend can continue. Michelle McGrade, chief investment officer at TD Direct Investing, says: "We have been advocating for small-caps since the Brexit vote. Now, after the strong rally, we are saying that investors need to be discerning about what they buy because the economic environment has become very competitive, especially in the consumer sectors. For example, Starbucks (SBUX:NSQ) announced its results a few weeks ago and profits were down 67 per cent, whereas Just Eat (JE.) announced its profits were up 46 per cent. It's going to be a cut-throat environment in certain areas and it will be a case of survival of the fittest."
But what about US market exuberance? Jason Hollands, managing director at Tilney Group, says investors should beware a sudden lurch from hope to pessimism if President Trump's measures underwhelm, and believes European equities are a better bet for UK investors.
"Valuations are less demanding, suppressed in part because of anxieties around the populist threat in a spate of elections, and growth is picking up," explains Mr Hollands. "European markets are also more skewed to cyclical industries than the US market, which could re-rate if global growth continues to improve. While dividend payout rates are quite high in Europe at around two-thirds of earnings last year, there is certainly more headroom for dividend growth than in the UK, where 90 per cent of earnings were distributed last year. Funds worth considering include Threadneedle European Select (GB00B8BC5H23), Henderson European Focus (GB00B54J0L85), Jupiter European Opportunities Trust (JEO) and Standard Life Investments European Equity Income (GB00B71L0M27)."
