A glimpse of what lies ahead
December offered a glimpse of the type of market behaviour that we can expect to feature in 2015: slightly unexpected moves driven by a lack of liquidity and a realisation that many asset values have been distorted by persistent central bank buying. The continuing fall in the oil price has been the dominant story. The debate continues as to whether this is a good or bad thing, but in the short term equity markets are taking it as a negative—the focus is less on the increase in disposable income and more on the implied lack of demand, deflationary effects and the financial strains imposed on energy-producing companies and countries.
Deflation arrives, and bond yields plumb new depths
Inflation became deflation in the eurozone before catching the Eurostar to present the UK with the 1% reading recently predicted by Bank of England Governor Carney. Bond yields fell as the anticipated rise in interest rates moved further into the future; the British government can currently borrow money for ten years at just 1.6%.
Mario Draghi repeated his hints that the ECB would embark on a programme of buying sovereign bonds. His latest assurance that details would be forthcoming at the 22nd January meeting helped spur European ten-year bond yields to record lows. Greek bonds were the exception, rising to over 10%.
Iceland retreats and Greece eyes the exit
Iceland decided that they do not want to belong to any club that would have them as a member, withdrawing their EU membership application. Greece could follow suit if a snap election at the end of January puts the Syriza party in power.
These political developments sit against a backdrop of persistent uncertainty. Our main reason for caution remains waiting for the transition from markets driven by central bank buying to one based on fundamental values. We had a brief glimpse of this in October when the end of quantitative easing in America caused markets to fall sharply, but this was rudely interrupted by a QE announcement from Japan and hints by the ECB, which have yet to be fully implemented.
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
Waiting for markets to stand on their own two feet
Economic growth in the United States compares well to the rest of the world but needs a period of consolidation to allow company earnings to catch up with market valuations. So long as interest rates remain at historically low levels, in many cases offering negative returns after adjusting for inflation, other asset classes will continue to offer attractive alternatives.
If fears of deflation persist then yields on fixed interest bonds could continue to fall, but the reward on offer is increasingly out of step with the potential interest rate and credit risk. We feel that most markets fully reflect expectations of good news that might take some time to arrive. However, as the past two years demonstrated, when central banks are calling the shots markets do not focus on value. Whilst this persists we are strongly in favour of running well-diversified portfolios.
Uncertainty ahead of May's general election, and the likelihood of a hung parliament, could undermine sterling assets. We feel that any coalition is unlikely to cause lasting damage to the recovery and will look for buying opportunities on weakness. Japan, Asia and selected emerging markets continue to offer good value but in the short term the strong dollar could cap returns.
When central banks are calling the shots, markets don't focus on value
The start of a new year may typically be associated with new beginnings but for us is not a reason to change our views. Our portfolios reflect the same overall positioning as before, though we have made two changes within that framework and expect a rise in market volatility to present further opportunities.
Adding Invesco Global Targeted Returns
Across the risk models we have included the Invesco Global Targeted Returns fund. We expect a rise in market volatility 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.
TwentyFour Corporate Bond for income
On the income portfolios we have bought the new TwentyFour Corporate Bond fund, adding a complementary source of yield within the fixed interest allocation.
Property still preferred over bonds
We feel that there is still more mileage to be gained from our property holdings, where yields compare favourably to fixed interest bonds. We continue to favour defensive equity income funds alongside these holdings.
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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