A global wave of monetary easing
The start of the new year has been dominated by an escalation in tensions with Russia, a messy stand-off between Greece's new government and the German-led ECB, and an unprecedented wave of interest rate cuts across the globe. Despite the uncertainty, risk assets performed well: Russian and European equities rose 14% and 4% respectively year-to-date, the UK and Asia each gained around 4%, and the US lagged with a more modest 2% rise. The global theme, however, has been one of unease over slowing growth and falling inflation.
Six countries cut rates as the ECB unveils quantitative easing
The past month saw interest rate cuts in Canada, Australia, Russia, India, Switzerland and — remarkably — four separate cuts in Denmark. Short-term interest rates in Switzerland and Denmark are now negative 0.75% as both countries try to halt the flow of money out of the euro. Yields on most European bonds maturing within five years are now negative.
The ECB announced its long-awaited bond-buying programme: from March until at least September 2016, it will purchase €60 billion a month of assets, including sovereign bonds, with the option to continue until there are signs of a return of inflation. European bonds fell to record low yields and the euro hit an eleven-year low.
Greece plays chicken while growth forecasts slip
Daily headlines have been dominated by the game of euro-chicken being played out by Greece's new Syriza-led government and the German-led ECB. The complacent assumption is that there will be a standard euro-fudge, with both sides agreeing to deceive the taxpayers, but there is a chance that both sides prefer the politics of strong leadership, resulting in Greece leaving the union.
Beyond the Greek drama, the global theme has been one of unease over slowing growth and falling inflation. Both the World Bank and the IMF downgraded their forecasts for global growth in 2015, the Bank of England warned of a more persistent risk of low inflation in the UK, and despite better-than-expected employment data from the United States the broader picture remained uncertain.
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
Central banks remain in the driving seat
It is getting increasingly difficult to earn a positive return on cautious investments such as bonds or cash. The bearish interpretation is that if so many investors are prepared to accept negative returns simply to keep their money safe, that does not reflect well on the outlook for equities. However, the gains made in January demonstrate that risk asset classes will remain in demand for those seeking a positive return on their investment.
A third reading, and one that we favour, is that most assets continue to be driven by the actions of central banks. Whilst we are pleased that this is benefiting our clients, we feel it would be irresponsible to fully embrace this move whilst disregarding market fundamentals. As bond yields have already fallen below all rational forecasts, there is no point in calling the bottom; however, there is little reward left for the increasing risk of capital losses.
We are not keen on fixed interest as a whole, but if pressed we prefer the additional income offered by investment-grade corporate bonds. The fall to record low yields in government bonds highlights the more attractive returns offered by commercial property funds.
Bond yields have already fallen below all rational forecasts — there is no point in calling the bottom
We continue to favour well-diversified portfolios with a bias towards defensive equity income, commercial property and absolute return funds over fixed interest. The year has already seen increased volatility, and we are keeping dry powder in low-risk funds ready to deploy when opportunities arise.
Lower-risk funds: switching out of gilts
On the lower-risk funds we sold the Legal & General All Maturities Gilt Index fund and bought the Fidelity MoneyBuilder Income Reduced Duration fund. This switch offers a pick-up in yield combined with less exposure to interest rate risk.
UK equities: favouring defensive income
In the UK we prefer the defensive qualities of equity income funds such as the Woodford Equity Income and the Standard Life Unconstrained Equity Income funds.
Diversification and dry powder
The Swiss National Bank's shock decision to remove its currency bands led to sizeable losses for some investors, but our well-diversified portfolios were not adversely affected. The year has already seen an increase in volatility across asset classes, although this has been mostly biased to the upside. We expect a reversal at some point and are keeping a portion of the portfolios 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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