The Lowdown on Markets to 1st April 2016
World Markets at a Glance
In this week’s issue
- Reflecting on the quarter the global markets have experienced a V-shaped recovery.
- Government long dated bonds have delivered some excellent returns over the quarter.
- Both commodities and the emerging markets experience a turnaround in performance.
- The price of crude oil rallies by 50% over the quarter before retreating back on over supply.
- The improvements in the global economy might spur the Fed to raise rates again in June.
- Government bonds continue to out-perform equities but the latter look better value.
“Global equity markets trade cautiously despite stronger economic data”
Last week saw the completion of the first quarter of the year, and a trading week that was crammed full of global economic data. Whilst most of the data appeared to be quite positive, the markets were in no mood to throw caution to the wind and therefore remained fairly resolute. Indeed, whilst the market has seen a V-shaped recovery in equities and commodities since mid-February, it has really been long dated government debt that has delivered amazing returns, propelled by a backdrop of subdued inflation, negative interest rates, and historically low yields on shorter dated paper.
And in terms of regional performances, Eurozone government bonds, with 10 year maturities, have given investors returns of 8 per cent; a performance that has only been beaten in two subsequent quarters and that was back in 1998. Likewise, US Treasuries have delivered comparable returns but the star performers over the period have been Japanese long dated government bonds which have provided investors with returns over 10 per cent, their best quarterly return since around 1991.
“This leads us onto the question of whether we are still in a bull or bear market”
Understandably, those bond returns that we have seen over the past few weeks makes the V shaped recovery in equities and commodities look rather insipid, excluding gold bullion and iron ore, which has certainly experienced a rotational turnaround in investor sentiment. And so, this leads us onto the question of whether we are still in a bull or bear market given the continued backdrop of macro noise and fundamental uncertainty.
Unquestionably, as we entered 2016 the global equity markets seemed rather tranquil, however, the climate changed quickly and we then saw the MSCI All-Countries World Index capitulate, as the price of crude oil collapsed, concerns over the slowdown of the Chinese economy advanced, fearing that the authorities had lost control, currency markets became more volatile, commodity markets went into freefall, and the US Federal Reserve Bank stepped away from further rate hikes in fear of global events.
“Global investors decided to take some “risk off the table” by selling down some of their equity positions”
Understandably, global investors decided to take some “risk off the table” by selling down some of their equity positions in favour of government bonds, gold bullion, selective currencies, such as the Yen, Swiss franc and the US dollar, all of these asset classes are considered to be “safe haven” asset classes in times of anxiety.
This de-risking of portfolio’s continued until mid-February, and then we saw the price of crude oil bottom out at just below US$30.0 a barrel followed by a rally of some 50.0 per cent as a slowdown in oil production growth and a pick-up in demand buoyed up market thoughts about a recovery in global economic sentiment. This in turn, has seen the MSCI All-World Index reverse out its earlier 11.0 per cent plunge, creating a similar rise, and near perfect V-shaped recovery over the quarter.
“We have seen a big rise in commodity markets and a meaningful rally in one of the most unloved asset classes over recent years, the emerging markets”
Similarly, we have seen a big rise in commodity markets and a meaningful rally in one of the most unloved asset classes over recent years, the emerging markets. Indeed, the inflows into emerging markets by foreign portfolios have surged to a 21-month high in March which is a sharp contrast to the outflows seen in previous months, and perhaps what is more astonishing is that Brazil, with its political dilemma’s, has seen its market rise by nearly 37 per cent since it bottomed out in late January.
Although this recent rise could be viewed as premature for these asset classes, given that we still have a supply over demand issue in global commodities, and a period where the Fed will begin to raise interest rates, which is not a compelling environment for EM’s, we are undoubtedly seeing some rotation out of previous market leaders into some of the laggards of bygone years.
Another issue of contention to consider is whether the Federal Reserve Bank’s continued dovish stance on interest rate hikes is still firmly in place under the “Yellen Put”. The idea being that Fed chair, Janet Yellen, will continue to help out the markets if any unforeseen disturbances were to create a market crash. Indeed, to some degree this was essentially seen last summer when it was anticipated that the Fed would raise interest rates in September, but heeded not to do so, when the markets corrected aggressively.
Also what we have seen in recent years is that central bank policy has meant that quantitative easing, tumbling interest rates, and bond yields has led to “currency wars”, which in turn, has created instability, higher levels of volatility, competitive devaluations and a change of investor sentiment from “buy and hold” to “trade the volatility”. This in turn, might have led to the members of the G20 agreeing to some sort of currency truce when they recently met in Shanghai, giving that the FX markets turns over trillions of dollars every day, and a more stable market might be favoured.
“Top of the agenda, was a series of important economic data from China, Europe and the United States”
And so looking at the markets last week, top of the agenda, was a series of important economic data from China, Europe and the United States. In China there are signs that factory activity has picked up in March as the country continues their transitional programme to become a much more consumer led economy. In the eurozone, the final readings of the March purchasing managers manufacturing Index showed that activity has slightly improved, whilst in Japan, there was some depressing news as the Tankan survey gestured a marked deterioration in business conditions within the manufacturing sector.
Finally, on Friday the March US employment report showed a 215,000 increase in there non-farm payroll numbers which were slightly ahead of market expectations with the jobless rate edging up from 4.9 per cent to 5.0 per cent. Additionally to this the average hourly earnings rate rose stronger than was expected taking the annual growth rate up to 2.3 per cent. Also there was a big jump in the Institute for Supply Management‘s manufacturing index from 49.5 to 51.8 indicating a move from contraction to expansion and stemming the possibility of a US recession.
“April tends to be a fairly generous month for investors”
Clearly, Fridays US data does increase the chance of the Fed raising interest rates in June; however, this alone is unlikely to be determining their actions given that they have already spoken in the past about outside forces, which in turn, could determine their overall decision. Looking at the markets, April tends to be a fairly generous month for investors followed by less predictable May.
And in terms of whether we are in a bull or bear market, the probability is that we might be in both, therefore, it has become even more important for global investors to be selective globally, sectorally and mindful that “trading the volatility” and “buying on the dips” might be more rewarding than the “buy and hold strategy” that has served investors well in the past.
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 .