The Lowdown on Markets to 27th November
World Markets at a Glance
In this week’s issue
- Global equity markets have difficulty building on their momentum from the previous week.
- China’s Shanghai Composite Index unnerves investors as it falls by 5.5 per cent.
- Turkey shoots down a Russian jet that was perceived to have strayed into Turkish airspace.
- Russian’s president Putin warns of consequences and announces sanctions against Turkey
- The UK chancellor announces his autumn budget with nasty surprises for property investors.
- Global Investors need to begin to focus on their asset allocations for 2016 and beyond.
What does this mean for the markets and asset classes?
“Global equity markets lose their momentum over China and Russia woes”
Global equity markets found it difficult to build any momentum on the previous week’s gains as concerns over China issues led to a subsequent fall of 5.5 per cent in the Shanghai Composite Index which unnerved investors. Furthermore, the shooting down of a Russian jet that had supposedly ventured into Turkish airspace also aroused fears that international security might be at risk as Russian president Vladimir Putin warned of “consequences”. Admittedly, the leading stock markets around the world seemed less sensitive to the Russian event than the horrific terrorist attack that had happened in Paris some 11 days earlier that claimed the lives of so many.
Performance of Global Equity Markets for 2015
Admittedly, the Russian president has subsequently declared economic sanctions against Turkey, in retaliation of the shooting down of the Russian jet. These restrictions will include imports of some Turkish goods, a ban on chartered flights between the two countries, and an end to Russian tour operators selling trips to Turkey. Obviously, other concerns are for the safety of some 90,000 Turkish nationals that work in Russia, and for their families, which would take that figure to nearer 200,000.
Understandably, there are ramifications for both countries under these sanctions, given that Russia is Turkey’s second largest trading partner, behind Germany, and given that more than three million Russian tourists visit Turkey every year. Clearly, from a Turkish perspective, president, Recep Tayyip Erdogan, has said that he does not want to harm relations with such an important trading partner as Russia and has asked for a face to face meeting with president Putin, however, Putin has demanded a formal apology from Turkey before agreeing to such a meeting.
And in respect to China, the biggest market one-day fall for three months came about because of worries over financial irregularities following reports that some of the country’s leading brokerage houses were facing regulatory investigations. Obviously Chinese anxieties, whether it be from macro events or economic data will continue to act as a fairly strong headwind for markets, but then on the other hand, looking at individual stocks, many are unlikely to react or suffer as much, given that their valuations look attractive, and better value than government bonds.
Performance of the Shanghai Composite Index for 2015
Clearly, the long bull market that began back in March 2009 might begin to suffer some fatigue as central bank polices begin to diverge, with the US Federal Reserve Bank raising interest rates next month, whilst the European Central Bank eases further monetary policy. Indeed, negative interest rates and an expected €20 billion increase in monthly asset purchases could be the likely outcome from this week’s ECB meeting. Any exploits from the ECB, along with further monetary actions from the like of the Peoples Bank of China, or the Bank of Japan, are likely to act as a divergence factor for their respective equity and bond markets, as investors navigate around the changes in central bank policy and the eventual pick-up in economic growth and international expectations.
In respect to the UK, the chancellor, George Osborne announced his autumn budget with the main two topics being his decision to scrap the proposed changes to tax credits, and introducing a further increase in stamp duty land tax of 3 per cent for the purchasers of “buy-to-let” and “second homes” from 01st April 2016.
Indeed, Mr Osborne’s primary goal was to deliver the Spending Review, so there was a weighty emphasis on departmental expenditure and the £4,000bn expected total government spending over the next five years. Nevertheless, the Chancellor did make a number of tax-related announcements:
- The rates of stamp duty land tax (SDLT) will be increased by 3% for the purchasers of second homes and buy-to-let properties from 1 April 2016. Three years later, any capital gains tax due on the disposal of residential property will have to be made as payment on account within 30 days of the disposal.
- Small business rates relief was extended for another year. With local councils also being given the power to control local rates, this looks likely to be an interesting development.
- There was a pause in pension’s announcements with pensions tax relief proposals deferred until next year. But the rate for the new single tier pension coming in from April 2016 was set at £155.65 a week.
- The Chancellor also announced that his controversial proposed changes to tax credits have been scrapped at a cost of £3.4bn in 2016/17.
Clearly, we now head towards the final month of 2015, with the likelihood that central bank policy will continue to dictate the direction of markets, and asset classes, as the Fed decides whether to raise US interest rates for the first time in a decade, and what affect that might have on equities and bonds, but perhaps more importantly, currencies and commodities. This in turn, could govern the early direction and investment climate for early 2016, and dictate the level of volatility as the cost of lending slowly rises.
In fact, if you just look at the price of gold bullion, it’s already reacted, as it fell to its lowest level for more than five years, in fear of a US central bank interest rate hike in December and the absence of any strong buying from India. Clearly, this precious metal, which tends to move contrariwise to the US dollar, has already fallen by 45 per cent since it hit an all-time high of US$1,793.00 a troy ounce some four years ago, after enjoying a decade bull run between 2001 and 2011.
Performance of Gold Spot Bullion for 2015
Arguably, global investors will need to manage their portfolios differently over the next few years, and begin to navigate a change of investment environment, as the cost of lending rises in the US, whilst in other parts of the world; central bank policy remains accommodative.
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 .