The Lowdown on Markets to 9th January 2015
In this week’s issue
- A disappointing start to the year for global equity markets.
- Bond yields fall as investors worry about the disappointing US unemployment data.
- The US dollar gives up some of its recent gains clouded by uncertainty about rate hikes.
- A further fall in the price of crude oil cannot be ruled out.
- The US unemployment data and deflationary fears blur the outlook for interest rate hikes.
- Equities offer greater potential than bonds in 2015 but it is likely to be a roller coaster ride.
What does this mean for the markets and asset classes?
“Global equity markets struggle in first full trading week of 2015”
As the first full week of trading in 2015 got underway equity markets in general found it difficult to make any headway. Unquestionably, the mixed US jobs report at the end of the week left markets on a downbeat note even though the numbers were the best since 1999 and that US companies did create more jobs than was expected.
Unfortunately, indications were that whilst a few more jobs had been created than was expected, it was the weak income data indicating that these new jobs are in the low paying sectors that troubled the markets, leaving some doubt about the actual strength of the US economic recovery, and what’s more, the participation rate showed that fewer workers are actively seeking employment which was very disappointing.
Undoubtedly, these recent numbers are likely to distress the Federal Reserve Committee given that the connection between the labour market, and wage inflation, is an important factor in getting the Fed’s target inflation number back to 2 per cent. Admittedly, the unforeseen collapse in energy prices has undoubtedly had a major influence in the recent fall in inflation rates around the world.
Certainly, this recent US data, together with the weaker overseas economies will permit the Federal Reserve Bank to keep rates lower for longer which will have important ramifications for the various asset classes, indeed, whilst we did see bonds out-perform equities in 2014, equities offer investors greater potential for returns than bonds in 2015. However, liquidity conditions and low interest rates remain supportive of bonds; therefore, we could even see bond yields retract further , particularly, with the central banks of the US, UK, Eurozone and Japan remaining accommodative.
Clearly, the global economy is continuing to recover, even if it is at a sub-par pace, and whilst the US economy is leading the way, regions such as the Eurozone remains sluggish with many economists now calling for the ECB to announce sovereign QE in response to deflationary fears. Unfortunately, whilst this might give the European equity markets a positive boost in investor sentiment, German bund yields are already at depressed levels, with two to five year Bunds offering investors negative yields and 10 to 30 year paper at 0.49% to 1.25% respectively. Unquestionably, if the president of the ECB, Mario Draghi, does respond with an QE announcement on the 22nd January, three and five days ahead of the Greek election and Fed meeting, then there will be an huge amount of interest in what bonds the ECB are likely to buy.
And so what does 2015 have in store for global investors? Well there are a number of key events and themes that will be running through the stock markets over the coming months, the direction of US growth rates, given their importance for the global economic recovery, a decisive decision by the European Central Bank in terms of sovereign bond purchases, the result of the UK General Election in May, the direction of crude oil prices, the Chinese economy, geo-political events, and whether the US and UK surprise the market by announcing their first interest rate hikes for six years.
Undoubtedly, from an investment perspective we believe that the sudden sharp fall in the oil price is the most meaningful event that has changed the current investment backdrop. Understandably, there are winners and losers; there are those countries that import energy that will see substantial benefits whilst there are those countries that export oil and have already seen their economies and currencies suffer.
Certainly, this lower oil price could be described as an unforeseen “tax cut” for many consumers around the world giving them a boost to their disposable income and leading to a boost in consumer spending. This in turn, will have some clear benefits for consumer discretionary stocks. Likewise countries such as Japan who is one of the largest importers of oil should be a beneficiary to lower prices.
Unquestionably, there are still a number of nasty risks in the market place that could de-rail the current fragile economic recovery, with the biggest concern probably skewed towards deflation. Indeed, some might say that we are experiencing a dis-inflationary boom; nonetheless, whatever the markets have in store for us equities still offer investors a better risk reward than bonds that look very expensive at this current time.
Understandably, there will be some winners and losers within the global arena with the likes of the US driving global growth in 2015 whilst the eurozone battles with deflation. In Japan, a combination of Abenomics and BoJ intervention will continue to revive the Japanese economy, whilst the Chinese economy is likely to slow further in 2015 as they gradually shift away from an investment and export led economy. In the UK the jury is out given the uncertainty surrounding the General Election, whilst in Asia and the emerging markets much will depend on the oil price, the continued strength of the US dollar, and of course the direction of commodity prices, given that many of these countries are sensitive to all three.
More broadly speaking, near zero central bank interest rates and continually falling bond yields makes it difficult for investors, especially those that are hunting for income. Certainly, we could experience some volatile times over the coming year, with investors continually switching from “risk on” to “risk off”, however, if you are able to be patient and accept the volatility, then “buying on the dips” might be a very good long-term strategy, given that we should see some pleasant corporate earnings surprises as we go through the 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 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.