Little Christmas cheer for markets
There was a lack of Christmas cheer for markets this month. Falling commodity prices and concerns over the persistent weakness in both the Chinese economy and its currency dulled the outlook for 2016. Japanese and Asian stock markets rose by a couple of per cent and UK shares fell fractionally, but overall there was little change in equity markets. Fixed interest bonds fell by around one per cent and commercial property continued its run of consistent small monthly gains.
The Federal Reserve acts at last
At long last the US Federal Reserve pulled the trigger, raising interest rates by 0.25% to a target range of 0.25–0.50%. The move had been well sign-posted and was greeted with a relief rally by most stock markets, which were also encouraged by a slightly lower projected path of future rate hikes.
Although the Federal Reserve Committee toned down their interest rate projections, they still suggest four rate increases during 2016. Current market expectations, as measured by the Fed Funds futures market, attribute only a 20% probability to just three US interest rate increases. The past few years have shown that it is pointless trying to predict the actions of central bankers, but we can observe a divergence between official projections and market pricing that will need to be resolved during the year.
Circuit breakers and currency fears rattle the new year
The weakness continued into the new year, with the yuan hitting a five-year low against the US dollar, leading to fears that other emerging countries would allow their currencies to fall so as to make their exports more competitive. Combined with the falling oil price, this raised the odds of global deflation despite the best attempts of the world's central banks.
Developed markets suffered their worst five-day start to a new year in history. Traders returning from the festive break were greeted with a 7% fall in Chinese shares, triggering the circuit-breaker mechanism that closes trading for the day. Other markets fell, albeit to a lesser extent, and oil prices hit new lows. The mood remained bleak when a second 7% fall triggered circuit breakers which closed trading for the day after just 30 minutes.
The worries attributed to China are not just about the depreciating currency or slowing growth, but about the actions of Chinese officials. Official interference in their stock and currency markets is well known, but in trying to open their markets there remains a reluctance to allow them to find their own level. The net result seems to be that there is still official meddling, but that it no longer works, giving the worst of both worlds.
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
Uncharted territory and the spectre of Brexit
Many market predictions are based on extrapolating previous perceived similarities with current conditions or on determining where we are in the business cycle. But the world has never been subject to a period of quantitative easing on this scale. Stock markets and economic cycles are showing different patterns to previous times, so no one really knows how things will pan out. Initially the fears were that QE would generate the highest inflation for decades; it might still do so many years down the road, but for now we have the possibility of commodity-based deflation to contend with.
This year we will tire of "Brexit", the terrible media slang used to describe the possibility of Britain leaving the EU. The likelihood is that we will see a referendum this summer, and putting aside the pros and cons of the whole debacle, what investors hate most is uncertainty. This has already been in evidence in the weakening of sterling and could also lead to higher yields on UK fixed interest bonds. There is no certainty that these moves will last, but it could lead to a summer of even more volatility.
The world has never been subject to quantitative easing on this scale. No one really knows how things will pan out.
We expect market volatility to persist and are therefore continuing to run robust portfolios that aim for performance over the longer term but with lower than average price movements during uncertain times. We remain ready to take advantage of opportunities if markets continue to fall, but with the current levels of uncertainty across the world, we feel that preservation of capital is paramount.
A blend of bonds for cautious and income portfolios
Where we hold bonds, on our cautious and income portfolios, we hold a blend of strategic, global and investment grade corporate bonds. We also hold some bonds where the level of interest is linked to a rise in interest rates.
Overweight UK equity income
We remain overweight in UK equity income funds across the portfolios. This is a sector rich in talent with a proven ability to add value over the longer term, and with several top funds offering more income than fixed interest funds.
Capital preservation first
We remain ready to take advantage of opportunities if markets continue to fall, but with the current levels of uncertainty across the world, we feel that preservation of capital is paramount.
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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