The Lowdown on Markets to 26th June 2015
World Markets at a Glance for Private Clients
In this week’s issue
- Last week’s financial markets were totally monopolised by events in Greece.
- It is unlikely that Greece will remain in the European Union or the euro over the long term
- The Chinese stock market falls by 7.4% but the market is still up by over 30% this year.
- Inevitably US interest rates will rise but there still seems some uncertainty on the timing.
- In Japan the Nikkei 225 Index hits a 15-year high but the economic data is still disappointing.
- Volatility to pick up over the summer but a “buy on the dips” strategy seems most sensible.
What does this mean for private clients, markets and asset classes?
“Stock markets react to speculative and tactical positioning”
Last week’s financial and business events were totally monopolised by the “make or break” bail out negotiations between Greece and its creditors, indeed, the intensity, and inconclusive end to the weeks proceedings left all parties concerned with the unenviable task of trying to come up with a meaningful last minute solution before the deadline expires at the end of this month.
Whilst it would appear that all parties involved have narrowed their differences on the two main issues of contention, pension reforms, and overhauling Greece’s confusing value added tax system, none of them appear to be able to go that extra mile to resolve the situation avert capital controls and a further run on the Greek banks. In fact, we saw a further €5.0 billion withdrawn from Greek bank accounts only last week. Equally, stock market speculators have been very busy over the past couple of weeks pushing the Athens General Index up by over 17.0%.
Admittedly, even if a deal is struck over the next few days, and it prevents an Athens default, it is still unlikely to be an end to this “Greek tragedy” given that Greece’s political and economic stability is so unstable that further bailouts in 2016 look unavoidable. Consequently, whether a deal is struck or not the short-term future does look rather grim for Greece and its people.
Equally, the events over the week-end have come to nothing with the Eurozone finance ministers rejecting a Greek request to extend their bailout programme beyond the 30th June and Greek Prime Minister, Alexis Tsipras, calling for a surprise referendum for the 05th July. Conversely, what seems to be very unclear is what the Greeks are actually voting on? Given that there appears to be no new deal on the table. However, what is interesting is that the opinion polls seem to suggest that near 50% of the Greek electorate is in favour of the yes vote and to remain within the European Union, the euro, and further austerity.
Clearly, the outcome surrounding Greece is very important for private clients given that a default could lead to eventual exclusion from the euro for Greece, the European Union, and trouble for other peripheral European countries within the Union. However, there are other events around the world that investors also need to be mindful of over the coming months, such as the slowing down of the Chinese economy, the unclear timing for a tightening of US interest rates, and the likelihood for further bond tantrums that will undoubtedly see core government bond yields rise further from their current levels .
And on that particular point, a higher US bond yield will equate to a rise in the cost of capital which has consequences for borrowers, which in turn, could easily unnerve global investors and those US dollar correlated global equity markets, likewise, a strengthening dollar also has ramifications for both the FX and commodity markets.
Inevitability, US interest rates will need to rise, but at the moment, the US economic data seems rather mixed, indeed, even last week we saw stronger US consumer spending data which would appear to support those members of the FOMC that have already voiced their opinions that they want to see a rate rise sooner rather than later. However, it is still possible that the Fed will continue to sit on their hands for a little while longer.
This of course allows short-term investors to continue trading on daily macro events, and worry less so about higher interest rates, or indeed, the longer-term fundamentals. Clearly, recent movements in stock markets such as China and Greece seem to support that view; indeed, the recent bad news from these two countries seems to have been good news for their respective markets.
Nonetheless, this is definitely a high risk strategy, and as we know market sentiment can turn very quickly, given that after last Fridays fall of 7.4% on the Shanghai Composite Index, and a 20.0% drop since its recent high, has now moved into bear market territory. Certainly, there are many market experts that have been puzzled by the recent Chinese stock market boom given that their growth rate is at its weakest pace since 2009, corporate profits are lower than they were a year ago, and that their economy seems to be suffering.
Of course one of the reasons for the recent rise in the Chinese stock market has been down to the explosion of margin buying, the practice of buying stocks with borrowed money, indeed, Macquarie has even been cited as saying that they believe that margin debt has now reached a record 8% of the markets free float, which in the eyes of some analysts appears highly toxic and can often end in tears for some private client investors.
However on a more positive note, the Japanese Nikkei 225 Index has hit a 15-year high, helped by the rally in global markets, hopes for a Greek resolve, and of course global investors building up their Japanese exposure. Admittedly, the Japanese economic data is still fairly disappointing given that the recent Markit/ JMMA flash purchasing managers index [PMI] has fallen to a seasonally adjusted 49.9 for June indicating that the economy is still contracting.
Confusing Data for Professional Investors and Private Clients Alike
Obviously, with such a backdrop of confusing data it is no wonder that some professional investors, as well as private clients are now voicing their opinions that we may have entered “bubble trouble territory” with the likes of the US equity market looking fully valued and expected to pull back from its current level. Equally, the Fed and many of the world’s leading central bankers have continued to remain accommodative with their monetary policies, which in turn, has supported the markets, and to some degree those global investors that have repeatedly reacted to macro events.
Also another driving force in the US stock market has been the resurgence of merger and acquisition activity which understandably did dry up throughout the earlier crisis period. Actually, M&A activity has been rather buoyant worldwide with some US$1.2 trillion of offered transactions recorded in the second quarter of 2015.
Clearly, the next few weeks are going to be rather testing for markets and asset classes, given that the Greek crisis is unresolved, the Chinese market volatile, and a Federal Reserve Bank that needs to begin tightening their monetary policy. Also from next week we will be entering the second quarter US corporate earnings season which should give us a clearer indication of how corporate America is adjusting to global events, and of course those important forward guidance statements from some of those truly global businesses.
Finally, whilst we fully expect a pick up in volatility over the summer months it is might be worth reiterating that high quality businesses that are held over long periods of time do deliver meaningful returns therefore we tend not to react to market noise only fundamental changes if required.
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum he worked within larger asset managers, primarily as an Investment Director within Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Investment Committee. This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.