Records everywhere, conviction nowhere
It was a month in which records were broken across asset classes but few were held. In Japan the Nikkei closed above 20,000 for the first time in fifteen years, the S&P 500 and NASDAQ made new highs, and the FTSE rose briefly above 7,100. Yet by month end, indices were scattered closely either side of break-even. In bond markets the picture was stranger still: the ECB's buying programme compressed yields to levels that strained credibility before a violent snap-back reminded investors that even central bank demand has its limits.
ECB buying compresses yields to breaking point
The European Central Bank's quantitative easing programme drove bond yields to new lows during the month. The German ten-year bund fell to a paltry 0.06%, while at one point 82% of European bonds were yielding less than 1% and 30% of eurozone government debt was trading on negative yields.
The month ended with a bizarre and violent reversal. As the euro broke above $1.10, the German equity market suffered its largest single-day fall since 2008, and the ten-year bund crashed — its yield leaping to 0.53%. With little to no risk priced into government bonds, we expect further sharp reactions to any hint of future inflation. On the other hand, the ECB has a large wad of money to squeeze those investors tempted to go short of bonds. Bonds are too dear, but the short-term direction is tough to call.
The Fed confuses while others cut
In the United States, the Federal Reserve continued to confuse with a disparity of views suggesting a start to the rate-hiking process any time between June and next spring. At their subsequent meeting, members noted the recent weakness in growth — first-quarter GDP came in at just 0.2% — but would not rule out a rise in rates next month.
Elsewhere, policy was more straightforward. Russia and Australia cut their borrowing rates to 12.5% and 2% respectively, and China announced an easing in reserve requirements for its banks. Here at home, David Cameron became the first UK Prime Minister since Clement Attlee to preside over a full term of unchanged rates.
Deflation worries, meanwhile, eased somewhat. The annual inflation rate in the UK remained unchanged, while the US and Germany noted the smallest of rises. A 13% rise in oil prices also concentrated minds that falling consumer prices were not a one-way bet.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Volatility is not the exception — it is the new condition
We have held the view for some months that markets would be more volatile in 2015, and the pattern this month bore that out. Rapid moves in either direction are the product of several factors: most asset classes are, at best, fully valued and many are discounting an unreasonable amount of good news; many investors realise this but are unwilling to jump off the gravy train first in case they miss out as the central bank buying continues; and there is an alarming lack of liquidity in markets, meaning that even fairly small buy or sell orders can have an exaggerated impact on prices.
The result is a variation of the old children's game, "Look behind you, Mr Wolf" — investors will continue to follow markets as they rise but run for cover as soon as they show signs of turning around.
Our concerns that growth in the US might be stalling stand. This past month witnessed an ugly slowdown in GDP for the first quarter and the largest trade deficit since October 2008. Whilst we accept that next month might offer favourable revisions, this data reflects our concern that the strong dollar is favouring cheaper imports over domestically produced goods.
Investors are playing "Look behind you, Mr Wolf" — following the market as it rises but running for cover as soon as it turns.
We remain underweight fixed interest across portfolios, preferring a combination of equity income funds, absolute return funds and a relatively high weighting in commercial property. With central bank manipulation making it impossible to call the top, we are keeping powder dry for when opportunities arise.
Equity income over aggression
We remain content with UK equities relative to Europe, and continue to favour the more defensive qualities of equity income funds over more aggressive options. In a broadly flat month our holding in Russia on the higher-risk funds returned a gain of 11.80%.
Income portfolios: the bond exception
The exception to our underweight fixed interest stance is on our income portfolios, where we mostly prefer the higher income from bond funds to lower-yielding absolute return funds.
Dry powder for the reversal
With the level of central bank manipulation it is impossible to call the top in any market, but we expect a reversal at some point and are keeping a portion of the portfolio in low-risk absolute return funds, ready to switch into good long-term investments when opportunities arise.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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