The Lowdown on Markets to 6th March 2015
In this week’s issue
- The global equity market bull market celebrates its six year anniversary on the 09th
- The ECB announces details of its long awaited sovereign bond quantitative easing package.
- In the US the latest non-farm payroll numbers outstrip market expectations.
- Whilst the Fed is expected to announce a rate hike soon wage growth remains subdued.
- In the forex market the dollar trades to its strongest level in more than 11 years.
- Arguably markets have rallied a long way since March 2009 therefore what’s next?
What does this mean for the markets and asset classes?
“The ECB announce the launch of QE whilst the Fed prepare for rate hike”
As we enter the second week of March it is might be worth focusing upon the significance of this week. Firstly, we will be celebrating the sixth year anniversary of current bull market, and secondly, it would appear from last week’s actions by the European Central Bank, and a conceivable change of monetary posture from the Federal Reserve Bank, that we might be very close to a strategic change of fortunes for some asset classes and markets as an impulsive turnaround in asset allocation could lead us into a period of uncertainty and higher volatility between the asset classes.
Clearly, through those bleak times between October 2007 and March 2009, investor behaviour and financial panic hit the markets very hard wiping off trillions of dollars in financial assets. Conversely, we now know that by March 2009 the stock markets had fallen by so much that it had become the best buying opportunity in a generation. Equally, this was a similar story between August 1992 and December 1999, and February 2003 to October 2007. Both of these bull market periods had lasted seven and four years respectively and had come off the back of a period of adversity, a recession in the early nineties, and the tech bubble bursting in early 2000.
Now as you can see in all three of these cases the bull market had run for between four and seven years, after differing catastrophes, and in all three cases, once the stock markets had collapsed many financial experts were telling their investors that the “buy and hold strategy” was dead and that the only way to make money in future would be to strategically time your trade in the markets and then take your profits whenever possible. However, the real problem with this strategy is that bull market returns tend to be much greater than bear market falls, hence the reason for “time in the market”.
None-the-less, when you’re sitting on top of the mountain it looks a long way down and that seems to be the case at the moment for some markets. Unquestionably, valuations were more attractive back in March 2009, than they are today, rather than cheap, they could now be classified as fair value to expensive, depending on the market and Metric used. This in itself can create a dilemma for global investors, especially, with the current uncertainties surrounding global growth and geo-political risk.
Naturally, we are seeing some nervousness entering the marketplace, but this is understandable, given that we might be heading for an inflection point. However, central bank policies over the past six years, and the falls in commodity prices, particularly crude oil, is creating further opportunities, however, saying that, over the next year or so, investment returns might be a little harder to achieve given that global investors might need to be more creative in their investment strategy and perhaps more timely when entering the market from this point onwards.
In terms of the current global economic outlook an acceleration of growth in the developed markets has been offset by weaker growth in the emerging markets leaving the overall global recovery rising at a modest pace, and with regards to inflation, the advanced economies are expected to record their lowest inflation rate for five years in 2015, before picking up momentum in 2016, as the effect of lower energy prices decline. Clearly, the US economy is continuing to recover, prompting noises that the US Federal Reserve Bank are not far away from tightening monetary policy. Admittedly, the absence of any meaningful wage growth in the US is puzzling many Fed officials leaving the picture for interest rate hikes uncertain.
Arguably, the most important event of last week came out of Europe when the president of the European Central Bank, Mario Draghi, unveiled the details surrounding the ECB’s latest stimulus measures and economic forecasts. Furthermore, the ECB said that the QE sovereign bond purchase programme would begin on Monday 09th March 2015 by buying €60 billion-worth of debt a month including negative yields of up to minus 0.20 per cent , the banks current deposit rate.
Mr Draghi went on to say that the size of the ECB’s programme, up to €1.1 trillion from Monday until September 2016 would clearly help support an economy that has suffered many years of crisis and stagnation and is likely to broaden and strengthen the overall recovery of the eurozone. Also the ECB raised their quarterly forecasts for growth to 1.5 per cent this year, up from 1.0 per cent, and expects the region’s economy to expand by 1.9 per cent in 2016 and 2.1 per cent in 2017, should the ECB complete their QE programme. Likewise, they cut there 2015 forecasts for inflation from minus 0.3 per cent to zero, and increased estimates to 1.5 per cent for next year and 1.8 per cent for 2017.
In Japan their economy is being supported by a weaker yen and much lower crude oil prices that will undoubtedly help Japanese exporters. Whilst Prime Minister Abe and his “Abenomics” programme face sterner tests in his second term of office the Bank of Japan are likely to become more active if their economy falters in any way.
Now looking more towards Asia, and the emerging markets, it is true to say that any impending US monetary tightening, stronger US dollar, and weak commodity prices will act as a headwind, that might weigh heavily on growth, However, selectively, many of these regions are importers of oil and will benefit from the lower prices. Additionally, rising Asian consumption, reforms, structural growth and advanced technology will be a very powerful cocktail for additional growth. Clearly, regions like India and Indonesia are two good examples of early structural reform successes as newly formed governments such as India’s BJP party, under Prime Minister Narendra Modi, and Indonesia’s Joko Widodo seek out ways to drive growth and prosperity into their countries’ economies.
In the UK, much like the eurozone and parts of the developing world we will benefit from the fall in food and crude oil prices. These important household savings, healthy employment rates, and rising real wage growth are all positives for the UK consumer and the economy. Regrettably, the elephant in the room is the uncertainty surrounding the outcome of the General Election and a resumption of austerity which ever parties form a new coalition given that it is unlikely that any one party will win with a clear majority. Like the United States we assume that interest rate normalisation will begin after the election, however, the timing for the first rate hikes is still uncertain.
And so if we revert back to the conundrum of the markets, now that the bull market is about to enter its seventh year, the question is “are they looking toppy and overdue a correction”? Quite possibly, however, there are some positives to take away from this current situation; firstly, we still have monetary policies from many central banks that remain dovish, indeed, both the ECB and BoJ will pursue further quantitative easing programmes which will weaken their currencies and enhance growth overtime. Secondly, some of the central banks of the emerging economies have begun to cut interest rates as inflationary pressures subside, thirdly, we cannot emphasis how important the fall in food and crude oil prices will be to households and consumers, and fourthly, the benefits from structural reforms that are being applied by some forward thinking governments in the emerging markets.
Clearly, we might need to prepare ourselves for a healthy correction over the coming months which could lead to some financial pundits resuscitating the comment that “the buy and hold strategy is dead” and that the only way to make money in the future will be to strategically time your trade in the markets and then take your profits whenever possible.
At the end of the day whether it is “time in the market” or “timing the market” might actually come down to an individual’s preference. Inevitability when you have been in lengthy bull market, and your sitting on top of that mountain, it does seem a very long way down, however, it’s always worth remembering that holding your nerve is critical, “time in the market” has been rewarding over the years and proven to be the right strategy, but then so has bargain hunting in very steep stock market corrections, perhaps the answer is a little of both.
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.