The Lowdown on Markets to 22nd January 2016
World Markets at a Glance
In this week’s issue
- Global stock markets remain volatile with many indices sliding into bear market territory.
- The European Central Bank helps lift the gloom with talk of additional stimulus packages.
- This weeks Fed Open Market Committee meeting could prove to be very interesting.
- The price of crude oil dips below US$30 a barrel before rebounding after a turbulent week.
- A rebound in the crude oil price saw the oil related currencies begin to strengthen.
- Continued short-term fears are likely to be the driver for risk assets over the coming weeks.
“The bears roar but the bulls show their horns creating a volatile week”
Last week saw world equity markets compound their worst start to a year since records began. This crazy period which has seen some markets fall by a meaningful amount over a few days, only to rise by a similar amount in rapid succession, has left market analysts and global investors scratching their heads as they try to ride out this stock market roller coaster as best they can.
Sadly, this year’s fast and furious movement in global equity markets has meant that many individual stock market indices have now fallen into “bear market territory”, indeed the FTSE All-World Index, a benchmark that a global investor can scrutinise for a generalised overview of the markets has now recorded a drop of 20 per cent from its last years high, signifying that it has moved into a short-term bear market situation.
“There are many anxieties that are affecting market sentiment so far this year, but in reality the markets have been trending down since around April or May 2015”
Regrettably, a multitude of negative events has sent the markets reeling over the past few weeks, confusion over the true economic picture for China, the continued fall of the crude oil price, further weakness in commodity prices, currency fluctuations, and overall nervousness regarding the outlook for global economic growth have all taken their toll. Unquestionably, there are many anxieties that are affecting market sentiment so far this year, but in reality the markets have been trending down since around April or May 2015.
And so typically, when you have been in an equity bull market that has lasted for some 7 years, and sentiment begins to dramatically change, then you can suffer some noteworthy sell offs, creating much higher levels of volatility and uncertainty. This to some degree has been the case over recent months, perhaps with the occasional relief rally, but never-the-less the trend has been down, not a great environment for investors given that the doomsters and perma bears come out of hibernation.
“It is very important not to continually focus upon the daily macro news and headlines as this can blur your judgement, which it turn, can lead to poor investment decisions”
Equally, it is very important not to continually focus upon the daily macro news and headlines as this can blur your judgement, which it turn, can lead to poor investment decisions. Justifiably, there are some nasty headwinds ahead that are likely to create further market disturbance over the near-term but we need to be mindful that some of these issues mentioned above could be overstated in terms of their negativity.
Firstly, it is true that the Chinese economy is slowing, and of course, they are trying to become a much more domestic driven economy rather than export driven. This will undoubtedly lead to issues and the Chinese authorities are very aware of this, therefore, any fiscal policies that they implement are going to create some disturbance. Clearly, they are trying to move away from the US dollar peg, by tracking the currencies of its broader trading partners, and the PBOC have already indicated that they feel this would be a better measure for their economy.
“It is unlikely that China, the second largest economy in the world, with the largest number of middle class people in the world, will bring the world’s global economy crashing down”
With this in mind, it is unlikely that China, the second largest economy in the world, with the largest number of middle class people in the world, will bring the world’s global economy crashing down, in fact, we can probably live with a gradually slowing Chinese economy, admittedly, if China were to experience a severe recession then that might be more of an issue.
In addition to the Chinese problem, has been the distressing fall in the crude oil price, in fact, the equity markets have become incredibly sensitive to the daily moves in the oil price, as commodity analysts and brokers try to determine how low it might go before it bottoms out. In recent times the price has dipped below US$30 a barrel with some market watchers suggesting that the price will dip below US$20 sometime this year.
At the current time OPEC supplies around two thirds of the world’s crude oil, whilst one third comes from the rest of the world. Whilst the fall has been painful for all oil producers it has been more so for the likes of the US oil shale providers, Russia, Venezuela and Nigeria. At the same time, with the world’s oil supply much greater than the current demand, and Iran preparing to restart regular crude oil shipments to the European Union, it is rather surprising that OPEC has not already considered a move towards cutting oil production. However, the Saudi’s did comment last week that the oil price as low as US$30 is “irrational”, therefore, any action by them might not be far away.
“In the past cheap oil has tended to buoy up the world’s economy as consumers spend their savings from the petrol stations on other consumer products”
Likewise, in the past cheap oil has tended to buoy up the world’s economy as consumers spend their savings from the petrol stations on other consumer products. Regrettably this time around it would appear that the consumer might have saved the money or paid off some debt. None-the-less other winners have been those countries that import vast quantities of oil such as India, China and Japan, and of course, businesses such as the major airlines and transport companies.
In addition to what happened to the markets at the beginning of the week, came the news on Thursday from the president of the European Central Bank, Mario Draghi, that further stimulus measures could be unveiled in March. This completely turned sentiment around and we saw both a rebound in equity markets and the price of crude oil. Obviously, this was then heralded as the possible start for a further period of central bank intervention with the likes of the Bank of Japan, and governor Haruhiko Kuroda, likely to announce further Japanese stimulus some time soon.
“We have the Fed’s Open Market Committee meeting on Wednesday, therefore, will the Fed chair Janet Yellen signal more caution and dovishness”
Also we have the Fed’s Open Market Committee meeting on Wednesday, therefore, will the Fed chair Janet Yellen signal more caution and dovishness putting any further interest rates hikes on hold until the global economy shows stronger signs of recovery. If this were the case then we might see other G10 central banks ease monetary policy in the first half of 2016, which in turn, could lead to a reversal of recent bearishness in favour of a strong relief rally in equity markets.
However, by the same token, it might be worth heeding a word of caution until we evidence support from a more bullish economic data outlook, or from better than expected corporate earnings data, given that we have been hear many times before over the past few years. Certainty, central bank stimulus has created positive euphoria, and inflated asset prices, but those prices will need to be supported by a growing global economy and a normalisation of interest rate policies at some stage in the future.
Unquestionably, we do live in interesting times but whether asset prices remain volatile, or indeed, normalise over time it does appear that investors will need to accept that investment returns will be much lower than perhaps returns have been in the historical past given that we still seem to be re-adjusting from those devastating events of the past decade, and of course, the importance of the developing markets in terms of the overall global economy.
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 .