A year of surprises behind us, a year of opportunity ahead
Expectations for 2014 had centred on markets being valued on fundamentals as the US Federal Reserve's monetary stimulus came to an end. It was anticipated that there would be a gradual increase in economic growth prompting a rotation out of fixed interest bonds into equities, with the big unknown being the extent to which the colossal increase in money supply would cause inflation to rise. In the event, the only inflation problem was a lack of it — helping bonds to outperform all developed stockmarkets with the exception of the US.
Geopolitical unrest absorbed, until the Fed pulled the rug
Over the course of 2014 investors took a stream of geopolitical unrest and contrasting economic data in their stride, supported by central bank buying. The only noteworthy market correction came in October as the Federal Reserve signalled an end to quantitative easing.
The Bank of Japan then picked up the baton and boosted its own stimulus package to include purchases of domestic and overseas equities. As deflation threatened the eurozone, President Draghi of the European Central Bank finally presented plans for a monetary easing package. Investors realised that the game hadn't changed, just the players, and they returned to buying mode.
Consolidation needed as the election looms large
We entered the new year needing a period of consolidation to allow company earnings to catch up with market valuations. At the time of writing, shares in the UK looked to be on a firmer footing with positive growth and less stretched valuations. We feel there is likely to be a period of uncertainty ahead of May's general election with the possibility of a hung parliament which will dictate whether or not the UK remains in the EU. This uncertainty risks dampening consumer and business confidence and possibly deterring investment in the UK.
The US stockmarket is arguably already fully valued but the economic positioning compares well to the rest of the world. Europe is in more of a mess than a toddler's placemat but will be supported by central bank money, as will Japan. Fixed interest bonds look expensive but could get more so if the threat of deflation persists, and property will remain a low volatility option with a reasonable yield.
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
Volatile markets, but a trend worth riding
To some, this may seem to paint a rather bleak picture, yet circumstances such as these are where the experience and expertise of discretionary investment managers such as ourselves can turn things on their head and really add value. So long as interest rates remain at historically low levels, in many cases offering negative returns after adjusting for inflation, other asset classes will offer attractive alternatives.
We do see another year of volatile markets, but we will look to exploit these buying opportunities within what we believe will be an overall future trend of rising markets.
2014 held more surprises than a Hitchcock movie, with possibly the biggest twist reserved for the autumn.
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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