The Lowdown on Markets to 25th March 2016
World Markets at a Glance
In this week’s issue
- Stock markets appear to be range bound, even if wide, both on the up and down side.
- US equities and the price of crude oil move almost in perfect harmony so far this year
- A concern over ‘BREXIT’ sees a surge in the cost of buying sterling currency insurance.
- Crude oil and commodities recover over the quarter but will this turn out to be a false dawn.
- Markets will now begin to focus their attention on vital economic data due out this week.
- Global equities still remain the asset class of choice even if volatile at times.
“Global equity markets react to a weaker yen but remain in a trading range”
As we come to the end of the first quarter of 2016 it is worth reflecting upon what has happened given that the global equity markets have been range bound throughout this period, in fact, the markets seem to have gone nowhere over the past 10 months or so. Actually, if you look at the period since the end of December 2015 to mid-February 2016 the MSCI World [total return] Index was down minus 10.0 per cent, however, since mid-February to the current time the index is up by 13.0 per cent, equally, the FTSE 100 [total return] Index demonstrates a similar trading pattern.
Likewise, if you now look back to the end of December 2014 to March 2016 the MSCI World [total return] Index has delivered a return of around 7.0 per cent, whilst the UK’s FTSE 100 [total return] Index is down by 0.9 per cent, heavily influenced by sectors such as oil & gas, mining, financials and retailers. Also it is fair to say that very recently the index has suffered from many companies cutting their dividends, “BREXIT” concerns, and the collapse of sterling.
“The markets have become fairly range bound”
Clearly, the markets have become fairly range bound, even if wide, overshooting on the upside when central banks announce further monetary policies, and increased liquidity levels, then in the same way, they overshoot on the downside when weaker fundamental news is broadcast and sentiment changes, quickly leading to higher levels of volatility and market distortions.
This recent investment environment has made it quite difficult for seasoned global investors and new incumbents to the markets. Indeed, the more traditional way of strategically investing for the longer-term, appears not to have been that successful over the past couple of years, in fact, it has been more advantageous for investors to try and time the market through tactical positioning and volatility trading. This second strategy has delivered better returns if executed by a professional and experienced investor.
Arguably, with so much uncertainty affecting market sentiment, be it, economic or geo-political, it has been correct to be rather more nimble in your asset allocations and asset class mix within your portfolio. Indeed, if you just look at the last two or three years, it has been justified for a UK investor to have had a much larger weighting in the international markets, given that the larger capitalised companies within the MSCI World Index has delivered a far superior performance than those of the FTSE 100 Index. Admittedly, sterling has been weak; therefore, a wider currency exposure has acted as a tailwind, saying that, investors have still benefitted from the broader diversification from global markets
Equally, if a UK investor were to have domestically diversified away from the UK large caps in favour of their smaller brethren, UK small and mid-caps, then they would have done even better in terms of total return. Admittedly, a two to three year time horizon is a very short period of time to judge any performance, but with lower economic growth, subdued inflation and zero, or negative interest rate protocol, the necessity to drill out respectable short-term total returns has been imperative, as it will have had a favourable effect on your longer-term returns, and assist in your overall objectives.
“We have recently seen evidence that some global investors have been buying up inflation-proofed US government bonds”
Looking at the bond markets we have recently seen evidence that some global investors have been buying up inflation-proofed US government bonds, given that the Federal Reserve Bank have shown some willingness to tolerate a higher level of inflation, and are therefore likely to tighten monetary policy more aggressively in the future. Unfortunately, for the US authorities whilst they could easily raise interest rates more rapidly this year, based on domestic data, they are finding themselves operating in a weakening global economy hence their continued dovish stance.
In addition to this, the recent recovery in the price of West Texas Intermediate crude oil has also supported the US Treasury Inflation Protected Securities [TIPS] market, but of course, there is still a belief that the oil price might weaken off again over the coming months, which in turn, might see a setback for US inflation-linked bonds later in the year.
“It is now very likely that the ECB’s new initiative will act as a further tailwind for strengthening European bond prices”
And in the Euro-Zone, the latest stimulus announcement from the European Central Bank that they would include corporate bond purchases within their bond buying programme has encouraged some bond sales by European companies. Indeed, it is now very likely that the ECB’s new initiative will act as a further tailwind for strengthening European bond prices, and falling bond yields, particularly, in the peripheral bond markets.
Obviously, the introduction of negative interest rates by central banks in Japan, Europe, Sweden, Finland, Denmark and Switzerland, has been responsible for the current one third of existing euro-zone government bonds trading at negative yields, this means that investors who buy bonds, and hold them to maturity, are now guaranteed to end up with less money than they started with which seems a crazy situation.
Conversely, in the UK a heightened fear of ‘BREXIT’ has seen an initial surge in the cost of buying currency insurance as sterling came under pressure against a basket of international currencies. The uncertainties surrounding the June referendum of Britain’s membership of the EU is likely to remain a constant worry for the foreign exchange and UK equity markets. Equally the recent anxieties surrounding the Chancellors budget, his tenor about slower growth, and further austerity, is also likely to suppress any good news that might be announced over the coming months.
Therefore to conclude this week’s review we should make some reference towards this quarter, given that it has been rather disappointing for both the markets and its investors. A cocktail of poor fundamentals, and macro news, has negatively affected most ‘risk asset classes’ seeing them trade rather unpredictably throughout the period.
“Sovereign bond markets have continued to deliver positive returns”
Admittedly, sovereign bond markets have continued to deliver positive returns, over what can only be described as rather lacklustre equity market returns, however, their does seem to be very little value left in the aforementioned, but on the other hand, you do have a powerful bond investor in the form of the central banks which could still propel bond prices even higher and yields lower over the coming months.
Interestingly, there has also been a turnaround in prosperity for a wide range of commodities; particularly that of crude oil which has rallied to US$40.0 a barrel, and iron ore that has risen by 30 per cent over the quarter. Whilst this has been rather opportunistic we still suffer from a supply over demand issue and therefore it is likely that we will see some price weakness return to this asset class over the coming months ahead, particularly, in crude oil where we could easily see the price retreat back to nearer US$30.0 a barrel.
By the same token, global investors seem to have been adding to their emerging markets exposure, give the recovery seen in the MSCI Emerging Markets Index. Clearly, this asset class has had a torrid time over the past few years and with the likelihood that interest rates and the dollar might remain fairly subdued over the coming months then EM’s could warrant a further review.
“We have seen a strengthening of the Yen in recent times”
Likewise analysts are likely to focus on the Asian markets over the coming weeks as economic data from Japan, China and South Korea will give us further evidence of how economic growth is panning out in these very important economies. Indeed, with respect to Japan, we have seen a strengthening of the Yen in recent times which will be a concern for the Bank of Japan, and therefore, the quarterly Tankan survey will be of most interest to the Japanese authorities.
Similarly, the Chinese authorities will also release there official March manufacturing and services purchasing managers index data which will be scrutinised very carefully by the market given the recent concerns surrounding the weakening Chinese economy. However, the most important data of the week is likely to be the U.S. non-farm payroll numbers for March, which will be announced on Friday, and be very significant for any decision the Fed might make regarding future monetary policy in April. Remember, a stronger than expected US jobs number, or signs of a pick-up in wage growth, could see the US dollar strengthen, leading to harmful consequences for the oil price, and of course, we know that oil and the US stock market have been travelling in the same direction for most of this year?.
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 .