The Lowdown on Markets to 16th October
World Markets at a Glance
In this week’s issue
- Have global stock markets and Fed Fund futures begun pricing in no rate hikes this year?
- The US Federal Reserve Bank may have missed their opportunity to raise rates in 2015.
- Global equities reach an 8-week high as stock markets and investor sentiment improves.
- Corporate earnings in the US are mixed as Walmart disappoints whilst GE beats expectation.
- Michael Dell has completed the biggest technology deal in history by acquiring EMC.
- Global equity markets are likely to remain volatile but that creates investment opportunities.
What does this mean for the markets and asset classes?
“Global stock markets rally as the chance of a US interest rate hike lessens”
Global stock markets, and the Fed Fund futures, have already begun to price in that it is unlikely that we will see any US interest rate hikes this year, in fact, they are now suggesting that there is less than a 50 per cent chance that the central bank will raise interest rate before March 2016. Indeed, with most of the recent global economic data now displaying signs of further weakness there are some sceptics suggesting that the Fed might even contemplate declaring a fiscal period of negative interest rates, or perhaps, applying more stimulus by announcing “QE4” [quantitative easing].
Arguably, global momentum now seems to have shifted to a more negative stance which does beg the question of whether the Federal Reserve Bank has now missed its opportunity to raise interest rates for the foreseeable future, this in turn, would have ramifications for future asset allocations as we edge ever nearer towards 2016. Similarly as we have seen over the past few months’ markets have a disliking to uncertainty, which in turn, generates higher volatility, therefore, the Fed really needs to make a real statement of intent, and either raise interest rates now, or become more much more transparent in their statements as the outlook and expected timing for monetary tightening.
Admittedly, the Fed’s intentions for monetary tightening in 2015 have now been clouded by outside forces over recent months, particularly, that of the slowdown in the Chinese economy, the backdrop risks in the emerging markets, the Greek crisis, and of course the geo-political uncertainties from the Ukraine and Syria. Clearly, the US economic recovery still looks to be on track, even if growth seems to be a little slower than the authorities would like, equally whilst the global economy seems to have weathered many of those recent events reasonably well there are concerns that momentum seems to be stalling and the risks of disinflation, or a US recession, has now manifested itself, particularly, with the rate of inflation remaining stubbornly low over recent months.
Certainly many of the FOMC members have been keen to keep US interest rates “lower for longer”, whilst global events unfold, but unfortunately this dovish approach could be dangerous, especially, if we experience another unforeseen harmful economic event, which in turn, might mean that there are no monetary tools left in the US central bank tool box, other than a period of negative interest rates, or additional QE to stabilise the situation. Conversely, outside of the US we are still likely to see further monetary easing and fiscal stimulus, especially in countries such as Japan and the wider regions of the eurozone where deflation is still a concern.
Consequently, if interest rates are to remain this low for a much longer time period than was first forecast, then investors might need to evaluate their asset allocations, given that cash deposits are likely to continue to be a poor returning asset class under both a lower interest rate and deflationary environment.
Alternately, under such a fiscal and economic backdrop asset classes such as fixed income would preserve capital values, therefore, ten-year government bonds, or indeed, longer duration bonds, might be something to consider as a more attractive asset class than cash. Likewise, a diversified equity portfolio invested in those markets that have the greatest prospects for economic recovery, capital growth, upward revisions in corporate profits and rising dividends could be a meaningful option. Therefore with that in mind, current regions such as Europe, UK, Japan and Asia look fairly attractive. Equally, high quality dividend paying stocks will continue to be a sort after asset class for those income seeking investors.
Clearly, stock markets and investor sentiment have rebounded this month, with global equities reaching an 8-week high last week. Understandably, this sentiment change has been fuelled by the prospect of the Federal Reserve Bank keeping interest rates to near zero for the foreseeable future and that the Chinese authorities will announce further economic stimulus measures very soon.
However, against this backdrop has emanated a mixed bag of third quarter US corporate earnings numbers. Regrettably, Walmart warned its shareholders that profits would be depressed for the next couple of years, whilst bankers Goldman Sachs third quarter profits were hit by almost 40 per cent, as they disclosed a drop in their bond trading and challenging conditions in emerging markets, whereas GE ‘s earnings beat market expectations.
Elsewhere, the bond markets continued to benefit from the dovish stance from the Federal Reserve Bank, whist in the FX market the euro edged lower on expectations that the European Central Bank might expand its asset purchase programme over the coming months. Likewise, it is possible that we will see further turbulence in the foreign exchange markets as other leading central banks around the world continually cut their interest rates, announce further QE, or use other accommodative measures.
Other important news that caught the financial headlines last week was the announcement that Michael Dell had sealed the biggest technology deal in history when the privately owned PC maker agreed to acquire the data storage maker EMC for about US$63 billion. This latest technology deal has meant that M&A activity in this sector has reached its highest level since the dotcom bubble of the late 1990’s with a value of around US$370 billion of transactions.
Similarly, the current takeover battle between AB InBev and SABMiller, if completed, will produce the world’s second largest brewer, and the third largest merger in history. This combined brewer would earn about half of the industries profits and sell one in three pints around the world. Indeed, this year has been a very big year for M&A activity with the likes of Royal Dutch Shell biding for BG Group, Charter Communications and Time Warner Cable and Heinz and Kraft Foods. In fact, there have been over 25,000 transactions announced this year with some of the biggest deals being seen in the healthcare, technology and energy sectors. Globally, the value of the M&A activity has been in excess of over US$3.0 trillion, which is very impressive given the economic backdrop.
Understandably, stock markets are likely to remain volatile for the rest of the year; however, it is also likely that equities will move higher over the coming weeks. Equally the difficulties that have repeatedly haunted the markets over recent months are also likely to spook the markets again, but by the same token, any anxieties in the markets that might lead to an aggressive sell off should be perceived as a buying opportunity, given that central bank policy should remain accommodative, at least for the time being anyhow.
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 a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed.
Investment Quorum is authorised and regulated by the Financial Conduct Authority