The Lowdown on Markets to 19th December 2014
In this week’s issue
- The Santa Claus Rally arrives by courtesy of Federal Reserve Bank.
- Risk assets rally as the Fed chair, Janet Yellen, comforts the market.
- Arguably for many investors 2014 might have been a year of disappointment.
- China and India benefit from government structural reforms and a fall in the crude oil price.
- Contrary to expectations bonds continue their bull market run in 2014.
- The US Economy leads the global economy on a path to recovery.
What does this mean for the markets and asset classes?
“Santa Claus Rally arrives late helped by Yellen Christmas spirit”
Finally the Santa Claus Rally has arrived, by courtesy of Janet Yellen and the Fed’s year end policy statement. Ms Yellen quantified that the US Federal Reserve Bank would be “patient” with regards to raising interest rates which heralded a roar of approval from the equity bulls followed by traders humming “tis the season to be jolly”. Unquestionably, the markets have reacted kindly to what they heard, given that the recent fall in the price of crude oil, and the collapse of the Russian Rouble, had created a period of nervousness and volatility.
Certainly, some of the global equity markets such as the UK have look oversold; especially some of the quality blue chip stocks, equally said, the FTSE 100 Index, is heavily weighted towards oils and miners, which have suffered from the fall out in commodity and energy prices. Likewise, we have seen the UK mid and small caps suffer this year, chiefly due to the economic backdrop and valuation concerns.
Arguably for many investors 2014 has been a year of disappointment. Contrary to expectations the bond bull market rolled on, assisted by loose monetary policies from many of the leading central banks, the global economic recovery continued to stutter, which had many investors repeatedly adjusting their asset allocations from “risk on” to “risk off, and then the geo-political confrontation between the west and Russia which tended to unnerved the markets throughout most of the year.
This awkward set of circumstances was then followed later in the year by the unforeseen collapse in the price of crude oil which had a resounding effect on those countries that were importers to those that are exporters. Consumers such as China, India and Japan were heralded as beneficiaries to the fall whilst it was very bad news for the major exporters such as Saudi Arabia, Russia, United Arab Emirates, Nigeria and Venezuela.
Certainly, for the likes of Russia the recent sanctions imposed by the west, and a 40 per cent fall in the oil price has quickly led to a total collapse of their currency, the Russian Rouble, leading Moscow to take fiscal action raising interest rates to 17 per cent.
And so with just a few trading days left in 2014, market performances are looking rather mixed, with the best returns coming from some of the developing economies such as China and India which has seen the Shanghai Composite and BSE Sens indices rise by 46% and 29% respectively. Similarly, we have also seen double digit returns from a number of the frontier markets.
In the developed markets we have seen Wall Street’s S&P 500 and Nasdaq 100 indices reach new all-time highs whilst to-date posting gains of 11% and 19% respectively. Regrettably, the UK market has been rather disappointing, and range bound for most of the year. Turning to Europe the region was influenced by political events, central bank policy, and geo-political turmoil which led to some mixed results across the various markets. Understandably, Europe will now wait for ECB president, Mario Draghi, as to whether he announces a “full blown” sovereign bond quantitative easing programme.
In Japan we saw Prime Minister Shinzo Abe surprise the market by calling a snap election, but then secure a further term by seeing his Liberal Democratic Party [LDP]retain its House of Representatives majority. However, the question is now “how will he use his new powers to push ahead with difficult and potentially unpopular economic reforms”.
Clearly, as we travel through 2015 the markets will be confronted with many important challenges, for example, the decoupling of central bank policy, with the US and UK heading towards monetary tightening, the Eurozone and Japan announcing further quantitative easing to stimulate their fading economies, and in the emerging markets and parts of Asia the prospect of further fluctuating crude oil prices, a stronger US dollar, and higher lending costs.
In the UK the result of May’s General Election is unusually difficult to predict but the outcome will undoubtedly have an important impact on property, pensions, taxation and investment. Whilst the new occupant of No 10 Downing Street is likely to face many new challenges it will be the occupant at No 11 that will need “nerves of steel, given that the next chancellor will need to deliver a further round of austerity packages, which might feel at times like you are standing in the middle of the road whereby you could get knocked down by the traffic from either side.
Finally, I would like to wish all of our clients and readers of “The lowdown” a very Happy Christmas and Prosperous New Year” and will be looking forward to seeing how next year’s markets develop.
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 larger asset managers, primarily as an Investment Director within Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Investment Committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed.
Investment Quorum is authorised and regulated by the Financial Conduct Authority.