The Lowdown to 30th October 2015
World Markets at a Glance
In this week’s issue
- Global equity markets enjoy a relief rally as they benefit from central bank policy.
- The Fed leave interest rates unchanged but suggest that a rate hike is not far away.
- In Europe the ECB suggest that further quantitative easing could be announced in December.
- Disappointment in Japan as the BOJ holds off from announcing further QE.
- The issues that have haunted the markets for most of this year still remain.
- Understandably, after such a gruelling August and September a relief rally seems underway.
What does this mean for the markets and asset classes?
“Central bank policy remains the principal driver for global markets”
Unquestionably, over recent years loose monetary policy and quantitative easing has been a huge positive stimulus for a wide range of asset classes. Certainly, this extended period of historically low interest rates in the United States has been, and continues to be, a powerful driver for investors to remain engaged in equity and bond markets. Equally with the authorities in the Eurozone and Japan still providing QE incentives, and promises, then a number of the markets seem to have an insurance policy against the effects of disappointments or bad news.
Indeed, if we look back over the past few months we can actually see that the markets have suffered from time to time over concerns about a weakening Chinese economy, threats of higher US interest rates, and a strengthening US dollar. Similarly, this has then been countered by dovish statements by the Fed, and talk of further quantitative easing by the European Central bank or the Bank of Japan.
This in turn, has led us to upward spikes in the markets and some very volatile days and weeks in the financial markets. Unfortunately, in respect of the Fed their nervousness about outside forces has deterred them from acting and raising rates sooner, which now means that they seem to be caught between a rock and a hard place. Clearly, the Fed need to begin to normalise rates before the next economic problem appears otherwise it might mean that their only two options will be to announce negative interest rates or QE4.
Unfortunately, the longer they now wait, the higher the risk is that they do make a policy error, admittedly, raising US interest rates when others are looking to ease, or flood the market with more QE, or devalue their currencies further, does give the Fed problems, as the likelihood of the US dollar strengthening further is high, and of course, this has further ramifications for the emerging markets.
None-the-less, this month has been very rewarding for global equity investors, given that the Federal Reserve Bank announced that they would leave US interest rates unchanged, whilst the European Central Bank hinted that they might announce further QE in December. Equally, in China the Peoples Republic of China Bank cut their interest rates, and eased their bank controls. Surprisingly in Japan, the authorities decided not to announce further QE, but if their inflation rate remains below their set target of 2 per cent, then further QE is inevitable.
This array of central bank action became the principal driver for global equity markets incentivizing investors to pile into riskier assets. In Europe we saw stocks put in their best monthly performance in six years, whilst the S&P 500 Index was on track for its best month since 2011. Likewise, in Japan the Nikkei 225 Index was up by just under 10 per cent for the month, whilst the FTSE 100 Index rallied by 5 per cent and the FTSE World Index by 8 per cent. Indeed the latter is just over 6 per cent below its record peak. Clearly, October has been a much needed month of relief for most investors, especially after such a gruelling August and September, as global markets fell indiscriminately and the sense of capitulation mounted.
Equally, whilst the markets are almost back to their near highs, the issues that have haunted them for most of this year still remain; therefore, we fully expect to experience more volatility and distress over the coming months. Unquestionably, global debt levels continue to rise and deflationary fears still remain, whilst monetary tightening in the US and UK cannot be far away. Arguably, we also have the International Monetary Fund cutting its global growth forecast for this year which all sounds a little gloomy.
Never-the-less, M&A activity remains healthy with some US$544.0 billion of deals announced in October alone, bringing the total for this year to around US$4.0 trillion. Indeed, only last week we heard the news that Pfizer are in preliminary talks to take over Allergan in a deal worth more than US$125 billion and with the current environment remaining favourable for takeovers and mergers this is unlikely to be the last big mega deal this year.
Finally, as we have been saying for most of the year it has been right to buy on the dips whilst being mindful of global events. However, with the Fed very close to pulling the trigger and raising interest rates for the first time in nearly a decade it might be worth remembering the saying “don’t fight the Fed” therefore look to stocks rather than bonds in a rising interest rate environment .
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 a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed.
Investment Quorum is authorised and regulated by the Financial Conduct Authority.