The Lowdown on Markets to 10th April 2015
- Global equity markets trend higher as investor sentiment remains positive.
- Europe hits a 15-year high assisted by the ECB’s €1.1 trillion stimulus.
- The Nikkei in Japan hits 20,000 for the first time since the year 2000.
- In the FX market sterling falls to a five year low on UK political uncertainties.
- Iron ore prices sink further on lack of demand hitting small mining companies.
- Equities still remain better value than bonds on valuation grounds.
What does this mean for the markets and asset classes?
“Eventually all bull markets end although no one can say when”
Many technical analysts will tell you “the trend is your friend” and certainly in recent times staying over weight equities has been very rewarding. Unquestionably, those that have had the healthiest appetite for risk have been more than compensated for their strategy. However, as a bull market matures some investors can become split between “greed and fear”.
Therefore, after a six year bull market it pays to be on your guard against possible “exuberance” and like the Sage of Omaha, Warren Buffet has said on a numerous occasions “Be fearful when others are greedy and greedy when others are fearful”. Indeed, these wise words could help safeguard you against the typical herd instinct that is seen near the top of a lengthy bull market.
Clearly, when you do have a bull market that lasts for a number of years there will be times when it will experience periods of high volatility, leading to peaks and troughs, with some investors trying to call the top or bottom of trading range, and of course at times when markets reach their all-time highs the pessimists will talk of forthcoming deep, or severe, correction.
Without a shred of doubt, you should try and ignore short-term noise and focus upon the longer-term outlook, and in the words of legend investor Peter Lynch “know what you own, and know why you own it”. Clearly, there is always a time when an investment is either fully valued, or overpriced, and should be sold, but that decision should come from conviction rather than a herd instinct.
Arguably, we might be getting very close to a noteworthy correction, and given that the month of May is not many weeks away, we will undoubtedly be hearing from those pessimists that will be telling investors to “sell in May and stay away until St Ledger day”. Equally, this could be a mistake given that in recent times, July 2010, August 2011 and May 2012 has provided investors with a good buying opportunity after an earlier correction. Furthermore, interest rates and bond yields are now sitting at their all-time lows, consequently, marching into cash, or bonds, at the first sign of equity market ugliness doesn’t seem an attractive option.
In addition to this over the past 66 years there have been 14 bull markets and 13 bear markets and whilst you might feel better selling the market in times of heavy turbulence the gains harvested in the good times more than make up for those falls in bad times, therefore, “its time in the market” rather than timing the market that counts. That’s not to say that drip feeding new money carefully into the market is unwise, indeed, the reverse, it’s never a bad thing to book cost average in times of enthusiasm, or panic, taking advantage of both rising and falling markets.
And so as global equity markets nudge higher and we continue to “climb that wall of worry” it’s just worth reminding ourselves that central bank policy still remains accommodative, especially in those regions such as Europe and Japan, where we have already seen their markets rally to their 15-year highs. Understandably, it would make some sense if we were to experience a pullback in the markets nullifying some of the recent exuberance, and giving investors a further buying opportunity.
Obviously, the United States, and the Federal Reserve Bank, still remains at the forefront of global market sentiment” given the uncertainty surrounding the US economy and the timing for higher interest rates. Clearly, the recent weaker than expected US economic data has altered some market views that the Fed would act in June, indeed, if we were to see any further disappointments then it is likely that the first rate hike would come nearer September, which in turn, was enough to push Wall Street higher last week, aided by the news that General Electric is to make some fundamental changes to its business model and dispose of its financial services operations. The company will then implement an aggressive buy back programme of its outstanding shares, and return back to its industrial roots.
Likewise, in the UK the FTSE 100 Index rallied strongly throughout the week gaining 3.75%. This rise was helped by the news that Royal Dutch Shell had made a bid for BG Group in a £47 billion takeover deal, prompting the market, and analysts, in thinking that this might be the beginning of a number of sizeable M&A transactions, indeed, rumors of bid talks surrounding the likes of InterContinental Hotels, Burberry, and Skye pharma have all buoyed up market sentiment. It was even reported that Vivendi, the French multi-national media company might be looking at acquiring TV group Sky.
Other stock markets that delivered some excellent returns this year have been China’s Shanghai Composite Index up by over 27 per cent, and Hong Kong’s Hang Seng Index which has risen by over 15 per cent. Whilst the Chinese market has benefitted from central bank policy the Hang Seng has rallied as a result of deregulation, arbitrage and speculative buying. Basically, Chinese punters have taking advantage of a new trading structure which has allowed them to buy up what is alleged to be bargains in the territory.
In the forex market sterling continued to weaken as elevated worries about the result of the General Election took its toll. Admittedly, the pound did perform better against the euro as FX traders await news from next week’s ECB meeting in Frankfurt. Likewise, the US dollar continued to strengthen against the single currency on suggestions that the Fed could still raise rates in June whilst the ECB continue with their aggressive quantitative easing programme.
And last but not least, whilst global equity markets seem to have made a good start to the year, helped by better sentiment surrounding the eurozone, we have seen a distinct change in investors’ appetite for US equities in favour of Europe and Japan. A divergence of central bank monetary policy between the big four is slowly affecting the way global asset allocators want to be positioned over the coming months, not just in equities and bonds, but also in currencies, as the race down to zero for interest rates and bonds is continually see’s foreign exchange markets experience rising volatility, which in turn, is having a damaging effect on investment portfolios if you are on the wrong side of a currency trade.
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.