Sharp falls, sharp recoveries, and a question of confidence
February really was a month of two halves. Most stock markets, including the FTSE 100, fell by between 5% and 15% in the first couple of weeks but closed the month in, or close to, positive territory. Fixed interest bond performance was mixed: government bonds were seen as a safe haven, with many hitting record low yields, but bonds issued by corporations suffered from the same risk-aversion trade as equities, with bank debt in particular struggling to find buyers.
Oil freeze sparks a rally while economic data disappoints
Although it was greeted with much cynicism at the time, the agreement between Saudi Arabia and Russia to freeze oil output at January's levels coincided with a rally across markets. Crude oil, which had been down 20% on the month at one point, rallied to end the month around 3% lower (it is currently up 12% on the February month-end). Shares followed suit with strong performances from Asian and emerging market countries.
With the notable exception of employment, economic data was generally poor. Forward-looking surveys added to fears of a global slowdown, and inflation remained benign with the Eurozone returning to deflation. Whilst some form of further stimulus is expected from the ECB's March meeting, Governor Kuroda of the Bank of Japan said that he was not thinking about cutting rates further (last time he said this it held true for one week).
In the UK, Governor of the Bank of England Mark Carney suggested that the Bank could still cut interest rates, though not below zero.
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
Einstein's definition of insanity and the limits of monetary stimulus
The strong surge in the gold price indicates all too well the loss of confidence in central bank policymakers. Einstein's definition of insanity was doing the same thing over and over again but expecting a different result. The developed world's central banks have provided huge levels of monetary stimulus with the aim of boosting inflation, and yet this has had no significant effect. For example, the European Central Bank began its quantitative easing programme in March 2015, but a year later headline inflation stands at minus 0.2% compared to minus 0.1% last March; core inflation also remains at the same level as last April.
Whilst central bankers clearly are not insane, there is a growing perception that they are making it up as they go along. The more recent example has been to drive interest rates further into negative territory, the theory being that it would encourage banks, corporations and individuals to go out and spend. What they do not appear to have taken account of is that, firstly, banks tend to make more money by increasing margins when interest rates are rising and, secondly, that companies and individuals are more likely to spend when confidence is rising. Neither of these factors is evident at the moment.
That said, we have noticed some lifting of the extreme gloom surrounding the start of the year. Equities have rallied well and US high-yield (junk) bonds witnessed the highest inflows since records began in 1992. This week iron ore recorded its biggest ever one-day gain, up 19%.
Do we trust this move? No, not really. The oil price may have bottomed, but there is still too much debt in the system and a reliance on central banks coming to the rescue. The change in banking regulations means that the lack of market liquidity is likely to remain an issue, leading to exaggerated moves in either direction as either "risk-on" or "risk-off" trades play through. We are currently in a unique phase where either a rise or cut in interest rates is likely to be perceived as bad news. We doubt things are as bad as recently painted by the media, and markets could easily end the year higher, but we still hold the view that there will be swings in both directions before then.
We are currently in a unique phase where either a rise or cut in interest rates is likely to be perceived as bad news.
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. It is precisely these market conditions that offer opportunities to invest for future long-term gains.
Asia and emerging markets contributing
The overweight positions in Asia and emerging markets served the funds well, with monthly rises of 3-8%. By contrast, Japan lost 3% as investors remained sceptical of official policy and the yen continued to rally in the face of negative interest rates.
Alternatives over bonds, defence over aggression
We continue to favour property and absolute return funds over fixed interest, and defensive equity income funds over more aggressive options.
Gold delivering strongly
The Blackrock Gold & General fund continued to make a worthwhile contribution, rising by a further 34% during February.
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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