The Lowdown on Markets to 29th July 2016
World Markets at a Glance
In this week’s issue
- The bull market remains intact but is showing some signs of fatigue.
- August can be an unpredictable month for markets but the trend is still your friend.
- The Bank of Japan latest stimulative measures disappoints the markets.
- In the US the GDP data shows that their economy expanded but less than was expected.
- It’s now the turn of the Fed and Bank of England to announce their monetary strategy.
- Global equity markets may trend higher but we might experience a pullback short term.
“Financial markets look for central bank guidance over the summer months”
Since the collapse of Lehman’s nearly eight years ago the financial markets have become much more dependent on accommodative central bank policies to support, and stimulate, their march upwards, in fact, this has led to a US bull market that has lasted for nearly the same amount of time, leaving it only second in the record books to that of the 1987-2000 bull market that lasted for 4,494 days.
Clearly, the banking crisis that followed the collapse of Lehman’s crushed the markets for a short-period of time, but then through numerous financial bailout packages and looser monetary policies the markets have surprisingly navigated their way to their current levels. That is not to say that throughout this period we have not suffered some traumatic times, indeed, from an economic and geo-political perspective the markets, at times, have had to “climb a wall of worry” but broadly speaking the mood from global investors has been to buy financial assets over that time frame.
Understandably, with sovereign bond yields, and interest rates, at their current historical lows global investors have been left with very little choice but to carefully buy equities, perhaps irrespective of valuations, given their need to achieve a better return than cash deposits. But of course, for income seekers capturing, and harvesting income, has become a real problem, hence the current situation that now sees pockets of the market becoming a rather crowded trade.
“We have seen a real turnaround in the direction of markets since the Brexit vote”
Certainly, we have seen a real turnaround in the direction of markets since the Brexit vote and the decision by the British people to leave the European Union. Pre-Brexit the markets acted nervously and then post-Brexit we have experienced both a “flash crash” and a “substantial recovery” for most assets and markets. However, we are now moving into the month of August, and over the past six years this particular month has delivered four down years and some rather erratic trading days.
Admittedly, this has been followed by a period of market strength, in fact, over the past six years the period between the end of June and December has seen the MSCI World [TR] Index rise by a further 6.0 per cent on average, and with so much global cash currently sitting on the sidelines, who is to say that we will not experience a similar outcome in 2016, particularly, if the central banks remain very accommodative with their monetary easing policies, and the senior officials continue to deploy the correct wording within their regular monetary statement updates.
“The ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough”
Indeed, last week actually marked the fourth anniversary of Mario Draghi’s famous statement when he said “the ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough”. Arguably, at a time when the Eurozone crisis was gathering momentum his words created a wave of stability within the financial markets, however, regrettably, the ensuing interest rate cuts and quantitative easing programs that have followed has suppressed bond yields and income levels to their current historical lows. Right now, the ECB are currently buying up to €80 billion a month of government bonds that now includes corporate bonds, which in turn, is rapidly swelling the ECB’s balance sheet. Furthermore, we now have a third of the world’s government debt market offering investors negative yields whilst some new issuances actually offer negative yields at their onset.
Obviously, over the past decade global investors have had a roller coaster ride as they have had to repeatedly broaden out their strategic and tactical investment horizons to try and capture the best returns they can from global equities, bonds, residential and commercial property, and alternative asset classes. Quite clearly the frequency of these global calamities seems to be trending at a much faster rate than perhaps they did in previous decades, however, it has been correct to uphold a level of calm throughout such events, and not to overreact, given the investment returns that you would have forfeited by panic selling and then trying to re-enter the market.
Admittedly, the current global economic picture does looks rather insipid with the likes of the IMF announcing downgrades to their global GDP numbers, however, the global recovery is unlikely to grind to a standstill, but we do need to see a widening out of the recovery, and then perhaps to a lesser extent the reliance of the United States, which at present, seems to be showing some good signs of recovery, but then is being hindered, not so much by domestic issues, but more to do with outside forces such as China, BREXIT, and the continual uncertainties in the Eurozone.
“The latest UK statistics have shown that the second quarter GDP figure rose by 0.6%”
Admittedly, the latest UK statistics have shown that the second quarter GDP figure rose by 0.6% which was slightly better than consensus expectations and up from 0.4% in the first quarter. This rise was mainly driven by industrial production which was up by 2.1% on the quarter, and the service sector, up by 0.5%, while the construction sector as expected shrank by 0.4%. Clearly, next quarters numbers will be scrutinized very carefully as they will begin to include the effects of post-BREXIT.
And so in respect to last week’s financial news, the main headline story was the disappointment from the Bank of Japan given their latest efforts to stimulate the Japanese economy. Indeed, the central bank opted not to cut its main policy rate, or target a more rapid expansion of its monetary base, however, it did announce an increase to its purchase of equity-linked exchange traded funds, which had an instant effect on their stock market, also the BoJ doubled the size of its US dollar lending programme which was seen to be a tactic to ease Japanese financial institutions difficulty in attaining dollar funding at an attractive price.
In the US the latest GDP data showed that the economy expanded at an annualized rate of 1.2 per cent in the three months ending in June, up from 0.8 per cent in the first quarter but short of the consensus estimate for 2.5 per cent growth. These numbers will undoubtedly be closely analyzed by the Federal Reserve Bank along with the next set of unemployment data. Obviously, forecasters will now focus upon the Bank of England’s next report which is due on the 04th August 2016 anticipating that an interest rate cut and further monetary stimulus is not far away.
“Positive earnings reports from the likes of Alphabet and Amazon helped Wall Street shrug off the fall in the oil price”
Finally in terms of the equity markets, positive earnings reports from the likes of Alphabet and Amazon helped Wall Street shrug off the fall in the oil price whilst in the UK a five week running streak came to an end for the FTSE 100 Index, which had advanced on the back of the weaker pound. However, we have seen a recovery in the FTSE 250 Index post BREXIT, but there is a clear divergence between those stocks that have overseas earnings potential to those that are more domestically driven.
In Europe we continue to see investors pull out money from the area as some global investors show concerns about the region. Also the markets had a rather lacklustre week in wary anticipation of the publication of the European bank stress test results, which then kept investors on edge. Equally, in Japan the frustration from the Bank of Japan’s lack of vision over its monetary policies kept investor’s sentiment low; however, the market did rise towards the end of the week due to the BoJ’s pledge to increase its buying of exchange traded funds.
“Growth risks have now shifted from the emerging markets to the developed markets in recent times”
Seemingly, growth risks have now shifted from the emerging markets to the developed markets in recent times, with BREXIT and the European banking sector keeping many global investors on edge, hence the continued money flows into perceived less riskier assets such as bonds and gold bullion.
Last but not least, Saturday marked the 50th anniversary of England winning the 1966 world cup, and as a young lad I remember it well, given the elated joy that this sporting achievement brought to the country, and at a time when the world seemed to be facing some enormous challenges, in the UK we still had exchange control, David Cameron was born, later to become our prime minister, and Henry Cooper floored Muhammad Ali [formerly Cassius Clay], but then went on to lose the fight, whilst in finance, Barclaycard launched the first credit card.
Bizarrely, some 50 years later in 2016 we have seen David Cameron resign as the countries prime minister, as Britain voted to leave the European Union, Muhammad Ali passed away after fighting many years of Parkinson’s disease, and the western world seems to be paying the price for those numerous years of financial indebtedness.
Remarkably it was not just England’s victory at Wembley stadium that created some history that afternoon, indeed, one of the most famous sporting quotes of all-time came into being. As Geoff Hurst scored the fourth England goal, seconds before the final whistle blew, Kenneth Wolstenholme the BBC’s TV commentator was heard to say “they think it’s all over, it is now”. Let’s just hope that this extended bull market that has been created by loose central bank policies does not warrant a similar statement as the Federal Reserve Bank begins to raise interest rates over the coming months.
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 .