Market Analysis - Archive
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When making investment decisions, there are a lot of things to consider and just as important as the initial decision of where to invest, is to keep an eye on how investments and markets are performing.
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Views expressed are those of the investment manager.
This is purely for information purposes only and does not constitute advice. If you needs advice then the recommendation is to speak to a financial adviser who will provide advice based on your individual needs and circumstances
No cause to panic – a review of the global markets
John Husselbee, Liontrust
Following the election of the Syriza party at the start of 2015, Greek efforts to renegotiate the terms of its economic bailout garnered ever more attention. The talks between the country and its creditors were seemingly interminable and saw multiple deadlines pass without any agreement reached on how its liabilities would be funded in future. Despite the column inches devoted to the issue, investors largely saw the negotiations as a sideshow, even when in July, 60% of the Greek people rejected the terms of a new bailout package that had been proposed. Somewhat surprisingly, having received a strong mandate to continue a belligerent approach to negotiations, Greek PM Alexis Tsipras a few days later backed down on most of the sticking points when submitting economic reform plans which were more to the liking of its creditors.
At the same time as the risk of Greek default and potential exit (or ‘Grexit’) from the Eurozone was diminishing, concerns were growing over the path of economic slowdown in China and the level of volatility in its stockmarkets. In contrast to the market’s apathy towards Greece’s travails, the worries surrounding China did cause some disquiet; global equity markets rolled over from their highs, while Asian equity market volatility spiked. Chinese equities had previously rallied substantially into what many deemed bubble territory before relinquishing chunks of their gains. Chinese authorities have been attempting to manage a slowdown in the economy towards a ‘new normal’ of ‘around 7%’ growth at the same time as avoiding instability in its stockmarkets. Despite significant and, in the eyes of most international investors, unwelcome efforts to create artificial stockmarket stability, Chinese equity markets nevertheless continued to experience volatility. When the authorities decided to devalue the yuan, this ushered in a new wave of negative sentiment, causing Chinese markets to plummet, and pulling global equity markets into a full-blown correction. The currency depreciation, which traditionally boosts exports, has been interpreted by some as a signal that Chinese policymakers are more concerned about the pace of economic growth than they are willing to let on.
We saw the Grexit saga as a slight red herring in terms of its potential economic impact and we believe that the Chinese sell-off is simply the most recent of a number of “risk-off” episodes which have hit markets since the Global Financial Crisis, although we acknowledge that investor sentiment may take some time to recover on this occasion. We are long term investors rather than traders. To put it another way, we would rather have a courtship of financial markets than an evening of speed dating. We have therefore been focusing on the event which we think will be the most influential driver of asset price moves in the longer term: an interest rate rise in the US. Where appropriate we have therefore used the recent market volatility relating to Greece or China as a chance to further position ourselves for a rising US rate environment.
We have been preparing for higher interest rates – in the US and UK initially – for some time now. As central banks ‘normalise’ their rates, we expect bond yields to rise (which means declining capital values). Many government bonds yield less than the long-term average rate of inflation meaning that buyers at current levels may well be signing up for negative real interest rates (i.e. inflation will offset the interest payments they receive). After several years of near-zero rates, the disparity between very high bond valuations (with correspondingly low yields) and economic reality could be thrown into harsh contrast when central bank rates start to rise.
When a US rate rise does occur, we also think that emerging market equities may offer up good long-term entry points. Higher US rates may mean a stronger dollar in the short term, which could see some money flowing away from emerging markets and back to the US. But the long-term implications of a strong US economy for emerging market growth are very positive.
In summary, there is currently no cause for panic: the global economy continues to grow modestly with most leading indicators in the US and Europe suggesting further expansion, and this is compensating for weakness in China and other emerging markets. The potential for contagion from Chinese financial markets into the developed world real economy is in our view far less than the market sell-off has suggested. Central banks are providing supportive policy in Europe and Japan, China is acting to stimulate its economy and the US will not raise rates without evidence of economic resilience.
The value of investments and any income may go down as well as up and will depend on the fluctuations of investments and financial markets outside of the control of Liontrust Investment Solutions Limited. As a result a client may not get back the amount originally invested. Past performance is not indicative of future performance and any reference to a security or fund is not a recommendation to buy or sell.
‘Reflation’ - but not as we know it…
By Co-Head of Multi-Asset at Henderson Global Investors, Paul O’Connor
‘With the global economic recovery looking anything but even, we take a look at the economic landscape after nearly seven years of unprecedented central bank policy and at the implications for investors.’
The world economy has grown for six consecutive years since emerging from recession in 2009. That is no mean feat, given the headwinds of austerity, Eurozone flare-ups, the slowdown in China and the related slump in commodity markets. It has certainly not been a boring time for those involved in investments.
While the economy has managed to push on – mainly thanks to life support from central banks – these headwinds have taken their toll and the strength of the recovery has generally disappointed. This can be seen in the progression of consensus economic forecasts, which show economists downgrading their estimates of global growth, more or less continually, since early 2011.
The best of times, the worst of times
Another key feature of the post-crisis recovery has been its unevenness, most obvious in the contrasting fortunes of developed economies and the emerging world. The developed economies were hit harder by the financial crisis and recession than the emerging economies, but they have rebounded more decisively. For these economies, 2015 looks set to be the fastest year of growth since 2010 and the first year since then in which all of the G10 (Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, UK and US) economies expand. It is a very different story in the emerging world, where 2015 looks set to be the weakest year of growth in seven years.
Of course, the diverging momentum between developed and emerging economies is only part of the story. There are significant differences within these groups as well. For us, the most meaningful way to capture the diversity across countries is to categorise them into the following three broad groups:
such as the UK and the US, which no longer need central bank policy support and now look strong enough to withstand interest rate hikes.
which are on the mend, but still need significant policy support. These include the Eurozone, Japan and South Korea.
which have poor economic momentum, financial frailties, policy credibility issues or some combination of these. Greece and the majority of emerging markets are in this group.
Naturally, these divergences in recovery are leading to meaningful policy divergence between countries. While central bankers in the recovered economies are now focused on timing their first interest rate increases, this must look like a nice problem to have to policymakers elsewhere. The latter are still focused on resuscitating struggling economies or nurturing fragile recoveries, often against a backdrop of structural inefficiencies and frailties in their financial systems. In these economies, interest rate rises remain a remote prospect.
More of the same
So, the global economy continues to face significant challenges, but it is nevertheless still growing, healing and pulling away from the global financial crisis. Our base case is for this to continue, albeit with episodic setbacks as the world’s financial vulnerabilities occasionally surface, as they have done recently in China and Greece. One positive aspect of this three-speed recovery is that inflationary pressures remain subdued globally, which should allow central banks to keep interest rates low for a long time. This means that, even though the recovery might be more sluggish and bumpy than previous upswings, there is a good chance that it will be longer as well.
Throw that rule book out of the window (sort of)
One key implication of this uneven global recovery is that financial markets do not have a playbook for it. When recoveries are so divergent, debt reduction such a powerful structural influence and when the magnitude of money printing by central banks is so colossal, the economics textbooks can stay on the shelf. Instead, asset allocators have had to adapt and need to keep adapting, recalibrating their models and giving greater emphasis to central bank policy, politics, and money flows, and less emphasis to established economic indicators.
While many features of the outlook described above seem set to persist for some time, we do see one key change in the months ahead that could have a lasting impact on financial markets. That is the move by the US Federal Reserve to raise interest rates. For us, this move and the similar action we expect from the Bank of England, will signal a regime-shift away from an era of central bank life support to a world with a bit less support but a bit more growth.
We are, therefore, in economic recovery, but not a textbook recovery. The economy may reflate, but price inflation may be less of a feature than in previous recoveries, instead manifesting itself through sporadic bursts in asset prices, or at more localised levels. Historical precedent can still guide us, but less so than in the past in this world of divergence, debt reduction and unprecedented central bank interventions. We expect surprises and volatility, but many opportunities to add value to our portfolios through careful asset allocation.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
Nothing in this article is intended to or should be construed as advice.
By: Subitha Subramaniam, Chief Economist, Sarasin & Partners
The early summer months have certainly been interesting times at home, but with the new government now in place and a new budget delivered, we should be able to look forward to some much needed stability. However, further afield there are some areas of concern to note, especially around the rising political and policy risk in Greece and around the Chinese financial markets.
There is of course a slight upside to political risk and that is that many significant concerns will already be visible in investor positioning, for example they may already be priced into equity valuations.
Volatility could be the new norm
Just as investors have grown used to low and negative yields, bond yields have rose sharply with a sudden selloff in European bond markets from mid-April to mid-May, though they have now fallen again due to the risk of Greek default.
We expect that markets will remain in a state of flux as the US Federal Reserve begins to normalise its monetary policy. The continuation of very low policy rates is set to encourage ongoing heightened sensitivity and volatility in bond yields across the globe. This suggests that government bond markets may gradually see their ‘safe haven’ status eroded as volatility rises, yields drift upwards and peripheral bond and credit markets are subjected to periodic bouts of risk aversion.
Ongoing confidence in the US dollar
Central banks’ intentional distortion of the price and availability of money (through interest rates and the money supply) has also distorted the relative price of currencies.
We believe that the US dollar remains the only credible ‘safe-haven/reserve’ among currencies.
We remain wary of the euro and yen, as currency weakness remains a priority for the ECB and Bank of Japan, as their large quantitative easing programmes continue.
A surprise Conservative majority in the General Election leaves us mildly more confident in the outlook for sterling.
This document has been issued by Sarasin & Partners LLP which is a limited liability partnership registered in England and Wales with registered number OC329859 and is authorised and regulated by the UK Financial Conduct Authority and passported under MiFID to provide investment services in the Republic of Ireland. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and we make no representation or warranty, express or implied, as to their accuracy. All expressions of opinion are subject to change without notice.
Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and also of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated.
Neither Sarasin & Partners LLP nor any other member of Bank J. Safra Sarasin Ltd. accepts any liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this information or any part of its contents.
2015 Q1 Review
Headlines: Equity markets performed strongly led by Japan and Europe, with the UK and US lagging their developed market counterparts. Fixed income investments were volatile, with a sterling investor making marginal gains over the period as a whole.
The second quarter of the year looks set to see a continuation of the volatility experienced in the first three months of 2015. After the strong start to the year for equity markets, implementing the old adage ‘sell in May and go away until Ledger day (September)’ a little early could prove a smart strategy. Some equity markets are expected to draw further strength from accommodative monetary policy, in particular the European Central Bank’s (ECB) Quantitative Easing (QE) programme and the Bank of Japan’s (BOJ) commitment to provide continued support to help encourage economic growth and inflation. On the other hand, political uncertainty in the UK and weakening economic data in the US, meanwhile, will likely prove unsettling at best. Fixed income markets, tied as they are to central bank interest rate policies, are expected to experience further volatility, with any rate move talk from the US Federal Reserve (Fed) and the Bank of England (BOE) in particular– or even speculation about this - set to cause price and yield changes.
markets are expected to become increasingly volatile as the May general election draws closer, and opinion polls may cause sharp moves in equities, bonds and sterling. This period is likely to extend beyond the vote date, particularly if no single party wins the majority vote. That expected volatility could present an opportunity for investors, although over the short-term little relative headway is expected to be made.
interest rate expectations will further impact US equity markets. A change in language from the Fed, particularly the removal of the word ‘patience’ from their post-meeting forward-guidance statement caused investor sentiment to fluctuate, and more of this is expected as Fed chairman Janet Yellen prepares the way for a rate hike later this year. A recent run of weaker economic data will also likely weigh on market confidence.
is providing a positive investment environment due to the boost from the ECB’s QE programme. Equity market sentiment is improving and should remain upbeat, while economic data has reflected some better than expected outcomes early in the year. Some concerns over deflation (price falls) remain, however, a short period of falling prices should prove a boon for consumers; a deflationary mind set becoming entrenched remains a risk though. Meanwhile, a weaker euro should prove positive for exports as European goods will be more competitively priced for overseas importers.
which include Russia, Latin America, India and South Africa, will continue to face a mixture of challenges over the coming quarter. While a tentative peace agreement is in place between Russia and Ukraine, uncertainty remains and further sanctions could be imposed should that peace agreement be breached. Additionally, lower oil prices and current sanctions against Russia are impacting the economy which the financial ministry expects to contract 2.5% over the course of 2015. While Russian equity markets started strongly in 2015 the remainder of the year appears to hold uncertainty for the investment environment there.
economy is showing signs of improving with data indicating a pickup in demand for goods produced there. The lower oil price is also benefitting consumers as it has made the cost of many goods more affordable. Over the first quarter Japan has posted the strongest equity returns amongst the developed markets in sterling terms and we are cautiously optimistic that this positive tone will continue, particularly as the BOJ has announced its intention to provide ongoing policy support.
economy continues to show signs of slowing, however reasons to consider remaining invested in the region endure. These include low sensitivity to potential US rate hikes which is particularly relevant this year, and the emergence of a consumer driven economy in a country with a population of 1.36 billion. Additionally, China’s policy makers said in March they have the capacity and willingness to inject further financial support into the economy should it be required.
This information is provided by: Architas Multi-Manager Limited, which is authorised and regulated by the Financial Conduct Authority.
The value of investments and the income from them can fall as well as rise and is not guaranteed which means you could get back less than you invest. Past performance is not a guide to future performance. Investments in newer markets, smaller companies or single sectors offer the possibility of higher returns but may also involve a higher degree of risk. The value of investments can fall as well as rise purely as a result of changes in the exchange rate
Review of six months to 28 February 2015
The global economy has been propped up for a number of years by the actions of some of its key central banks, such as the US Federal Reserve (‘the Fed’). Its main means of stimulating the economy has been via a programme - called quantitative easing (QE) – which boosts the money supply in the economy, with the main objective of lowering interest rates and stimulating investment and other economic activity.
However, the Fed confirmed that it would be ending this programme in October 2014, which led to a spike in volatility on financial markets as worries rose over the underlying strength of the global economy. But a combination of action from other central banks – such as those of Japan and the eurozone – and a fall in the oil price meant that bonds and equities ultimately performed well through to the end of 2014. The eurozone’s European Central Bank (ECB) announced in January 2015 that it too would be implementing a quantitative easing programme in an attempt to stop a slide towards dangerous deflationary conditions. This fuelled a fairly strong start to the new year.
The oil price roughly halved in the last quarter of 2014. This fall was partly a result of slowing global growth. But it was in our view also a sign of oversupply. There has been a glut of supply coming on stream from higher-cost shale producers. The Opec cartel (organisation of petroleum exporting countries), whose largest producers are Saudi Arabia and Iran, cut its forecast for 2015 oil demand to its lowest level in 12 years but seemed to recognise the role of non-Opec producers in driving high supply through a refusal to cut its own output. Opec has so often been the cause of supply shocks in the past as the organisation used its oligopoly status to drive oil prices higher but now appears reluctant to manipulate the market upwards, preferring to put its higher-cost competitors – such as shale gas producers in North America – under pressure.
The fall in the oil price has for many countries acted as a boost to their economic recovery. While oil exporting nations clearly suffer from the price fall, for the majority of countries and companies that consume rather than produce energy, the ‘automatic stabiliser’ effect of lower oil prices in boosting economic activity is clear. We have therefore seen equity markets largely perform well as the declining ‘growth tax’ effect outweighed the negative impact on the shares of the big UK oil companies such as BP and Shell.
Looking forward, the US seems the most likely to pull along the rest of the global economy. The two-speed nature of this growth is a concern which prompted the World Bank to highlight the global economy is “running on a single engine”. The big fear is that the US gets dragged backwards by a slowdown in other economies such as Europe and China. However, we still believe that China provides a major boost to the global economy, even though its growth rate has dropped from its remarkable levels previously. We also think that the ECB’s new programme should keep the eurozone economy afloat. The main risk to this outlook comes from the eurozone periphery. Victory for the anti-austerity Syriza party in the January 2015 Greek election knocked local asset prices but failed to have a material impact on European markets still basking in the warmth of the ECB announcement. This is despite the possibility that Spanish elections later this year could see a strong turnout for the like-minded Podemos party.
We currently think equities are a better value investment than bonds. To justify bond valuations would require one to believe that deflation and stagnant growth should be expected. We do not think this will be the case. We think economic growth will be positive, if underwhelming, and that central banks will keep interest rates low in the short to medium term. This could lead to ‘goldilocks’ type conditions: low growth and low inflation, in which companies can expand their profit margins, which could result in equities performing well.
Please note returns do not take account of platform, product provider or Adviser fees. Any figures shown have not been externally audited. The value of investments and any income may go down as well as up and will depend on the fluctuations of investments and financial markets outside of the control of Liontrust Investment Solutions Limited. As a result a client may not get back the amount originally invested. Past performance is not indicative of future performance and any reference to a security or fund is not a recommendation to buy or sell.
All figures in this document are sourced from Bloomberg unless otherwise stated.