The Lowdown on Markets to 27th February 2015
In this week’s issue
- Global equity markets remain robust if not cautious as the focus shifts towards higher rates.
- The FTSE 100 Index records a new intraday and all-time high breaching the levels set in 1999.
- In Europe 10-year German bund yields contract on diminishing worries over Greece.
- The European Central Bank prepares to announce it inaugural QE programme.
- In the forex market the dollar strengthens whilst the euro hits a near 12 year low.
- Global equity markets remain the investor’s choice of preference but a pullback beckons.
What does this mean for the markets and asset classes?
“The FTSE 100 Index hits a new all-time high as global indices march on”
Finally, the FTSE 100 index has reached and breached the level it was in 1999 amid the dot- com bubble. Indeed, back in December 1999 the UK’s leading index closed at 6,930.20 after peaking on an intra-day high of 6,950.60.Then during the financial crisis of 2007-2010 the index fell to below 3,500 in March 2009 before rebounding to its current level over a six year bull market that has seen the likes of Wall Street’s numerous indices regularly record new all-time highs.
Furthermore, the likes of the FTSE All-World Equity Index has just recorded a record high supported very much by its largest weighting of 54% in North America, followed by a 12% exposure towards the European Monetary Union, 8% to Japan, and 7% in the United Kingdom. Equally, in terms of global sectors, the weightings in healthcare, industrial goods and services, technology and banks has been very beneficial towards its rise. And in terms of its largest 10 constituents only two companies are represented outside of the USA, with Apple Inc being its largest component.
Clearly, the global equity bull market over the past 6 years has been very rewarding for investors, in fact the same might be said over the past 15 years, even when you take into account the likes of the dot-com bubble bursting, the financial and euro-zone crisis, and the tragic events of the twin towers, or subsequent terrorist acts and geo-political events. Equally however when you look at something like the FTSE 100 Index that was 6930 in December 1999 and is now currently 6946 the index returns gives you the impression that it has been rather abysmal.
Obviously, for those astute investors that bought the FTSE 100 Index at its lowest point on the 09th March 2009 have been rewarded handsomely, on the other hand, we are told by many intellectual market statisticians that “it’s time in the market not timing the market” that gives investors superior returns, clearly this might generate a healthy debate from those that invested in the FTSE 100 Index at the end of 1999 and remained loyal throughout the 15 year period.
However, what we can say is that it is very difficult to be successful market timer unless you are a professional investor that is continually watching events unfold in the global economy, or individual domestic markets. Therefore, for many investors “time in the market” will deliver superior returns.
Moreover, what is equally important is to ensure that you invest on a total return strategy, as this can make an incredible difference to your overall performance. For example by re-investing your dividends from the FTSE 100 Index over the past 15, or indeed, 6 years your total return would have been over 67%, and 143% respectively. Likewise, if you then take the FTSE 250 [ex Investment Trust] Index over the same time frames your total return would have been even more.
Likewise, if you were then to look at the total returns on a global perspective you will find that over the past 15 years the FTSE 100 Index has been a poor relation versus its overseas brethren such as the emerging markets, the S&P 500 Index, or even the FTSE Eurofirst 300 Index. Understandably, when investing in overseas markets currency movements do play a very active part in performance; however, this gives an investor diversification within their portfolio and a much wider opportunity to investment into some of the best companies in the world.
Looking at last week, global equity markets continued to show resilience with the US shaking off a downward revision to fourth quarter GDP growth and the move upwards in crude oil prices. In the UK the FTSE 100 Index continued to flirt with its previous intraday and closing highs set earlier in the week, and in the Eurozone some encouraging corporate earnings reports helped to push European indices higher whilst in Asia we saw the Nikkei 225 Index hit another 15-year high.
In the fixed interest market diminishing worries about Grexit, Greece’s exit from the Union, saw the yield on 10-year German Government bunds contract, as investors continued to stockpile into fixed interest assets in preparation for the ECB’s announcement regarding its quantitative easing agenda which will see the central bank buy sovereign bonds, pushing the prices up, and reducing liquidity.
Likewise, in the United States the 10-year Treasury yield reacted nervously to Fed chairwoman, Janet Yellen’s commentary on inflation data and interest rates. In her address to the Congressional Senate she sought to give details on inflation, the labour market, economic conditions and policy guidance for the timing of a change in US interest rates. Undoubtedly, with core consumer inflation showing signs of a pick-up, and normalization, we cannot be far away from the Fed announcing an interest rate hike.
Obviously, last week’s statement from the Fed had an immediate effect on the forex market with the US dollar rising about 1 per cent, and to within its best level since 2004. In Europe we saw the single currency trade to near its lowest level in nearly 12 years, as the ECB move ever closer to its inaugural round of quantitative easing, and in Russia the rouble strengthened, enjoying its best month since the 1990’s, helped by the stabilizing oil price and easing geo-political tension between Moscow and the Ukraine.
In the commodity markets the price of Brent Crude Oil showed further resilience experiencing its biggest monthly rise since May 2009. This move was stimulated by upbeat demand from Europe, China and India along with supply disruptions in big oil producing countries such as Libya who faced a shutdown of some major ports and oilfields, due to unrest, and Iraq supply disruptions created by poor weather conditions.
Overall, the markets have remained fairly robust, if not nervous over the past few weeks, with the European markets attentively out-performing. Undoubtedly, this trend has been stimulated by the forthcoming QE programme and weaker euro whilst the US equity market seems to be running out of momentum concerned by the Fed’s recent statement on possible monetary tightening. In the UK we have seen the FTSE 100 Index breach its 1999 all-time high but now anxiously awaits for General Election directives.
Whilst in the first two months of the New Year “risk on” equity investors have been generously remunerated we must now be mindful, and watch the bond markets carefully, given that at some point they will turn negative as interest rates and inflation begin to rise. This will be a time of high volatility and nervousness for the markets but it will also offer opportunities for those longer-term investor to add to quality positions on any healthy pull-back.
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.