The Lowdown on Markets to 13th November
World Markets at a Glance
In this week’s issue
- Global equity markets suffer from another week of uncertainty about the global economy.
- The latest economic data from China and the US creates further doubt and indecision.
- Will the Fed begin their monetary tightening policy next month or wait until early 2016.
- Further weakness in commodities possibly heralds the end of the commodities super cycle.
- In the FX market the US dollar regains some of its upward momentum.
- The world economy still remains on a firm footing but investors need to be mindful.
What does this mean for the markets and asset classes?
“Global equity markets have recovered but remain in a tight trading range”
Once again the stock markets around the world reacted cautiously last week to signs that global growth was indeed slowing. Some renewed weakness in commodity prices, on the back of poor Chinese data, and US retail sales figures, created a downdraft of uncertainty, which in turn, then begs the question, “what will the Fed do next month with regards to interest rates”. Clearly, the futures markets are still pricing in a 70 per cent probability of an interest rate hike in December supported by comments from some Fed officials over the last few days.
The problem that the Fed has is that their opportunity to raise rates was earlier in the year and now even if they being tightening by a small amount, and over the next 12 months we see the Fed fund rate at nearer to 1 per cent, then it could bring the US back down with a nasty bump, especially, if the rest of the world continues to stutter. Also if we were to experience any further unforeseen shocks from the Chinese economy, or heightened geo-political risks, then this could create some added volatility.
Unfortunately, last week’s US retail sales figures were disappointing, similarly was the Producer Price Index figure, [PPI looks at three areas of production, industry based, commodity based, processing based]. This would indicate that there were no real signs yet of a pick-up in inflation, which seems to indicate that the US consumer is still just getting by and not actually spending any of the saving seen from the weaker oil price. Obviously, we are moving ever nearer to the festive season and perhaps the Fed might defer their interest rate decision until the New Year to see if there is any change to consumer sentiment throughout that period.
“The commodity super cycle appears to have come to an end”
Obviously, the commodity super cycle appears to have come to an end, and the repricing of most commodities has already happened, indeed, last week we saw the price of copper fall to its lowest level since 2009, whilst the price of Brent Crude and WTI looks vulnerable to further falls, nearer to the US$40.00 level, as global oil inventories have risen to a near record 3 billion barrels. Meanwhile, even gold that tends to spike higher on global concerns has fallen to a level not seen since February 2010.
Arguably, the recent weakness in the Chinese economic data has led to the latest drop in commodity prices; however, it might be that we are now getting very close to the bottom in pricing, especially, if concerns surrounding China, and indeed the slowing global economy have been overdone. Firstly, if we look at China it is quite obvious that their central bank, The Peoples Bank of China, have many more tools in their tool box and will react accordingly, and secondly, in terms of commodities, we are already seeing a cut in supply which will eventually assist in the slump in prices.
Irrefutably, the leading central banks around the world will continue to play a very active part in the stabilisation of global economic conditions over the coming months, if not years, with the European Central Bank, and Bank of Japan, becoming much more responsive towards announcing additional monetary easing over the coming months, whilst the PBOC and other Asian central bankers take into account their own domestic conditions and any effects that US monetary tightening might create over time.
Clearly, one area of contention that tighter US monetary conditions might bring is a further period of US dollar strength, and therefore, currency movements will continue to play a very important part of a client’s portfolio performance over the months and coming years. Indeed, as we stand today, with the likelihood of decoupling of central bank policy, pair trading, or currency hedging, between the likes of the US$/¥, US$/€ or US$/£ is likely to have a major influence on both investor and corporate returns over the coming few years.
“From a regional perspective we continue to favour Europe and Japan within our asset allocation”
Consequently, from a regional perspective we continue to favour Europe and Japan within our asset allocation, given that those countries, and weaker currencies, the euro and yen, will clearly benefit those European and Japanese exporting companies, likewise, their valuations look more attractive than many other parts of the globe such as the US which looks fairly valued at this current time, and the UK which faces further austerity and the question of Brexit. Admittedly, a weaker pound does have its attractions, along with mid and cap stocks that consistently outperform their larger brethren over long periods.
Conversely, that is not to say that there will be little opportunity on Wall Street, quite the reverse, sectors such as technology will still perform well over the long-term, as businesses and the consumer continually upgrade their technology to keep pace with technological change. Equally, US consumer discretionary and healthcare stocks should deliver respectable returns.
Likewise, the emerging markets have had a torrid time underperforming the developed markets by a considerable margin. None-the-less, this has now left EM equities comparatively cheaper than many developed markets and whilst it would be difficult to foresee a quick turnaround of fate for these markets, there are many that are benefitting from the weaker oil price given that they import crude rather than export and are less affected by the collapse in commodity prices. For these reasons it is worth being mindful given that at some point the tide will turn fir this asset class.
“We still see some investment opportunities within selective regions, sectors and currencies”
And so whilst the dilemma is still very much focused upon the Fed and their decision in December whether to raise rates or not, we still see some investment opportunities within selective regions, sectors and currencies. Without doubt the remainder of this year will be volatile, and 2016 is likely to be as challenging, however, the world economy remains on a firm footing despite a deceleration in the US and Japan since earlier on in the year, therefore, any periods of stock market weakness or panic selling should be viewed as a buying opportunity for long-term investors.
Finally, whilst the markets did experience a fairly frustrating week, it goes without saying that those tragic events in Paris on Friday echoed much sadness and despair around the world, and of course, whatever happens in the world of finance over the coming weeks bares no real significance against the tragic loss of life and suffering that we all saw on our television screens over the week-end.
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 .