The Lowdown on Markets to 24th April 2015
- Whilst equity markets remain mixed the NASDAQ composite returns to familiar territory.
- Understanding the “new tech world” from the “old tech world” might help.
- “Bad news is good news” and “good news is bad news”.
- Commodity markets: Brent oil and iron ore see their prices rally’.
- Currencies: the Turkish lira hits a record low against the dollar.
- The bull market remains intact but investors need to be wary “think slowly before you act fast”.
What does this mean for the markets and asset classes?
“The Nasdaq and Nikkei rally to levels not seen in 15 years”
A mixed week in the markets saw Wall Street’s S&P 500 and the Nasdaq Composite indices set new record highs, helped by macroeconomic data and earnings reports, whilst hear in the UK the FTSE 100 Index advanced to close just under its record high. Equally, in Europe positive earnings numbers helped to balance out uncertainties over Greece, whilst in Japan the Nikkei 225 Index continues to gain momentum whereas Chinese stocks lost a little of their momentum after their recent strong gains.
However, it was the gains recorded on the Nasdaq Composite and Nikkei 225 indices that hit last week’s financial headlines given that these levels were last seen some 15 years ago back in the peak of the dot.com bubble. In terms of the NASDAQ it was helped by some robust corporate earnings numbers from the likes of Google, Amazon and Microsoft, pushing the index higher, whilst in Japan, the Nikkei has been on an upward trajectory since February 2009 when it sat at around 7568, but has now breached 20000.
Clearly, much has changed over the past 15 years with the world’s financial markets having survived many financial crisis such as the tech bubble busting, the tragedy of 911, stock market crash of 2002, the sub-prime housing crisis, the global recession of 2007-2009, war on terror, numerous corporate fraud cases, and many horrific natural disasters, including the terrible earthquake that hit Nepal on Saturday.
All of these issues have left us with either a horrific loss of lives, or uncertainties about the future, however, what can be said is that globally we appear more robust in dealing with these events given that governments, central banks, financial authorities and aid organizations act much quicker to help in the recovery from such events, and unquestionably, it’s the progress in areas such as technology that has been instrumental in changing mainstream businesses and people’s ability to resolve and tackle problems quicker and more effectively.
Understandably, last week’s rise to a new all-time high on the NASDAQ does bring back memories of the dot.com bubble of 2000, however, back then you did have companies such as Pet’s .com, and internet delivery services Webvan and Kozmo.com, which were on ludicrous valuations, generated no profits, and very little revenue. Also at the peak the tech boom the NASDAQ was valued at 100x forward earnings, compare to today’s figure of 20x earning.
Furthermore, in today’s world, it’s the likes of tech titans such as Apple Inc, Google, Facebook, Microsoft and Intel that lead the way, with many of these businesses having so much cash on their balance sheet they have difficulty knowing what to do with it all. Indeed, in recent times Apple Inc announced the biggest quarterly earnings figure in corporate history.
These are fortress balance sheets not start-up businesses that promise jam tomorrow, however, this is not to say that the whole of the technology sector is “blue chip”, far from it, but clearly there are quality technology companies in the world today that will continue to revolutionize the future for other businesses, and sectors, such as energy, healthcare, biotechnology consumer services, agriculture and a host of other specialist areas.
Similarly, we have seen a turnaround of fortunes in the Japanese stock market, since it bottomed out in February 2009. Certainly, the electoral success of the Liberal Democratic Party, under Shinzo Abe, has led to many achievements, under the “Abenomics three arrows” programme, however, economic growth and prosperity is still remains rather sluggish suggesting that further structural reforms and monetary policy will be required over the coming months and years.
None-the-less for those global investors that have actually embraced “Abenomics” over the past few years have been richly rewarded, especially, if they have hedged out the Japanese currency. Indeed, throughout this recovery period the Bank of Japans loose monetary policies and quantitative easing programmes have certainly propelled the Japanese stock market upwards whilst greatly weakening off the yen against many other leading currencies around the world.
Another primary force at work has been vigilant corporate governance given that implementation, and postponements, in the past have led to significant losses in corporate values. Consequently, the composition of a new Japanese index called the JPX Nikkei 400 has been formed. This new index is composed of companies which have a high appeal to investors and that meet requirements of global investment standards, such as efficient use of capital and investor focused management viewpoints.
Unquestionably, both the NASDAQ and Nikkei have risen substantially over the past few years and therefore it is likely that we will hit some market resistance sometime soon, but then the very same could be said for most equity markets. However, what is perhaps more intriguing at the moment, is that we are now in the midst of the US corporate earnings season, and whilst some companies have highlighted a negative impact on their earnings due to dollar strength the equity markets continue to act positively, obviously, at this current time “bad news is good news” and “good news is bad news”.
Given that positivity still remains in both bond and equity markets seems to indicate that investors do not believe that interest rates are likely to rise sometime soon. Therefore, with this in mind, the support for the bulls remains intact. Admittedly, many equity markets do look less appealing than they did a few years ago but until we see an event that will change investor sentiment, the markets are likely to remain positive.
Clearly, there are many threats that could de-rail this bull market, a Greek exit from the European Union, problems in the emerging markets, given the strength of the dollar, US equities running on fumes, or indeed, that global investors just decide that it’s now time to leave the party. Therefore, whatever the reason might turn out to be, it’s worth remembering one thing “think slowly before you act fast”.
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.