The Lowdown on Markets to 24th July 2015
World Markets at a Glance
In this week’s issue
- Global equity markets trend lower as uncertainties and disappointments take their toll.
- A further sell-off across the board in commodities sees leading mining stocks retreat.
- Perceived disappointing corporate earnings and wary guidance statements affect sentiment.
- The price for Gold bullion falls to its lowest level in five years after heavy selling in Asia.
- In the FX market commodity currencies suffer as the Aussie dollar slumps to a six year low.
- Whilst asset allocators raise cash weightings a pullback will be seen as a buying opportunity.
What does this mean for the markets and asset classes?
“Disappoints from both sides of the Atlantic reflects in market sentiment”
Once again global equity markets found themselves trading lower over the 5 day trading period as a cocktail of disappointments and uncertainties brought some of the individual markets down by near 3 per cent. In the US and UK a fresh sell off in the mining stocks and metal prices affected sentiment as investors emotions rode high. In Europe poorly received corporate earnings numbers from both sides of the Atlantic took its toll dragging the FTSE Eurofirst 300 Index down from its earlier six-week high. Even Japan’s Nikkei 225 Index retreated marginally as the latest Chinese data hit sentiment in the Asian region.
Figure 1: markets suffer from disappointing corporate earnings and sliding commodity prices
None-the-less, on a total return basis the leading indices in Japan, Europe, the United Kingdom and United States are still holding on to their positive returns for the year. Equally, talk of higher interest rates, a stronger US dollar and concerns over the Chinese economy has clearly hit investor sentiment predominantly in the emerging markets where the MSCI emerging markets Index is lagging the MSCI World Index over the year.
Figure 2: talk of higher interest rate, stronger dollar, and Chinese worries harms emerging market sentiment
Whilst central bankers in the US and UK are still accessing the timing for interest rates to rise, and assurances of a growth recovery in the second half of the year, it would appear that a multitude of headwinds are continually giving the central bankers an uncomfortable time. An unresolved Greek crisis, the collapse of commodity prices, a rising US dollar, a meaningful slowdown in the Chinese economy, deterioration in Q2 global trade, disappointing corporate earnings numbers, and signs of a broader US equity market decline is not helping with their decision making
Questionably, global growth does remain a concern with the likes of the IMF and the World Bank already cutting their global growth forecasts for 2015, indeed, with respect to the World Bank it has slashed its growth forecasts for the developing world, which is quite troublesome given that the emerging markets share of global GDP is over 50 per cent, and has been classified as the “growth engine” for global growth for some years.
Certainly, the past few years has been a perfect environment for the emerging markets with cheap dollars, booming commodity prices, and a relatively weak US dollar, unfortunately, this is about to change, expected US interest rate hikes, a collapse in commodity prices, and predicted rise in the US dollar will make the environment quite difficult for EM’s until fortunes change again.
Equally, some of the recent perceived disappointing earnings numbers has led to a few companies discussing the future impact of slower global economic growth, the stronger US dollar, and lower oil prices. Admittedly, the lower crude oil price can benefit some of these businesses, and of course the consumer, whose savings from the petrol pump could lead them to spending more on other goods. Similarly, if interest rates were to rise, even by a small margin, it might deter them from spending, which in turn, could lead to a pullback in the Consumer Confidence Index.
Figure 3: Since March 2009 the FTSE All-Share consumer indices have risen aggressively
Obviously, as we move nearer towards September the market will undoubtedly focus more upon the Federal Reserve Bank, and Janet Yellen, as the FOMC contemplate their move, and whilst it is likely that they will announce their first US interest rate hike for many years, the US bond market appears to be behaving itself, reflecting that a modest pace of interest rate shifts in the coming years is the most likely outcome. Likewise, in the UK it is expected that the Bank of England will deliver their first rate hike sometime in the first quarter of 2016.
Clearly, the commodity markets are finding the slowdown in global growth, particularly in China, a difficult environment. Indeed, with prices of major commodities such as oil, gold and copper falling sharply, and concerns rising about individual mining and oil drillers debt levels, it is very likely that we will further divergence in performance particularly amongst the miners and those with lower debt ratio’s. This is likely to see the larger mining companies cope better than their smaller brethren which may have weaker balance sheets. Whilst this asset class has had a horrendous time over the past few years it is likely that this will continue, particularly, if we see further weakness as worries remain over global growth and the bearish sentiment persists.
In precious metals the gold bullion price has fallen to its lowest level in five years as short-term heavy selling from Asia has hit the yellow metal price hard, in fact, it was reported that more than US$1.7 billion worth of gold bullion was dumped in a matter of minutes in the early part of the week. Since peaking above US$1,900 a troy ounce back in 2011 the gold price has now dropped by more than 40 per cent. Arguably, gold has been accumulated in the past as a hedge against inflation, but with so much uncertainty surrounding the future direction of inflation, and the greenback, the gold price might remain unfashionable.
Understandably, this rout in commodities has also led to a fall in commodity currencies such as the Australian dollar that has slumped to a six-year low against the US dollar; and the Canadian dollar that has fallen to its weakest level since 2004.
Figure 4: It’s been a torrid few years for commodities and mining but good for global equities
Arguably, since the middle of April markets have found it incredibly difficult to make any headway with the majority in negative territory. However, looking at the calendar year the MSCI World [TR] Index is up by 4.74 per cent whilst the MSCI Emerging Markets [TR] Index is down by 1.49 per cent.
Noticeably, there has been a decrease in bond asset allocations over the past few weeks, in favour of cash; consequently, if we were to experience any significant correction in global equity markets over the next few weeks then it would be likely that a relief rally in equities would follow. Arguably, the equity markets will remain volatile, given the ongoing uncertainties surrounding Greece, China and the timing for US interest rate hikes, however, equities still remain better value than bonds or cash therefore buying on the dips still remains a good option for long-term investors.
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.