A month shaped by oil and unfulfilled promises
Oil dominated proceedings this month. OPEC's inability to agree a production cut sent prices sharply lower, delivering a windfall to importers and consumers through rising disposable income but wreaking havoc on energy producers. Central banks were already revising down their inflation forecasts even before the full effects of this latest fall were felt. Against this backdrop, the ECB disappointed on quantitative easing, Japan rallied hard on fresh stimulus, and the UK's Autumn Statement offered more for voters than for markets.
OPEC deadlock sends shockwaves through energy markets
OPEC's failure to agree a cut in production sent the oil price to its lowest level since the start of 2009. On the one hand this is seen as good news for oil importers, manufacturing companies and consumers, who are experiencing a rise in disposable income. On the other, it is having a calamitous effect on energy-producing companies and countries.
Even before the full effects of this latest fall are seen, central banks have been revising down their inflation forecasts. Governor of the Bank of England, Mark Carney, hinted that UK inflation might well fall below 1% over the coming months. The ECB lowered its forecasts for both GDP and inflation, but still failed to agree on implementing a full programme of quantitative easing. Markets have accepted the prospect of action early next year, but patience with Draghi's constant assurances is wearing thin.
Tokyo surges on stimulus while the Chancellor plays to the gallery
The new monetary stimulus announced last month by the Bank of Japan pushed the Nikkei through the 17,000 barrier for the first time since 2007. Shares fell briefly on news that Japan had fallen back into recession, but rallied as Prime Minister Abe called a snap election for December. The index is currently testing the 18,000 level.
In the UK, the Autumn Statement was aimed more at voters than markets. However, it reinforced the view that for all the talk of austerity over the past few years, the country remains massively in debt and the real cuts in public spending are yet to come — after the election.
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
America powers ahead as Europe flounders
The US stockmarket is fully valued but enjoys an economic backdrop that compares well to the rest of the world. Growth in the third quarter was revised up to an annualised 3.9% and shares continued to make new highs. In stark contrast, Europe is a shambles, with politicians fiddling as Rome, Paris and even Berlin metaphorically burn; deflation beckons and the data suggests a strong chance of a return to recession. Having said that, the German Dax continues to make fresh highs.
Shares in the UK look to be on a firmer footing, with positive growth and less stretched valuations. There is likely to be a period of uncertainty ahead of May's general election, where the composition of a probable hung parliament will dictate whether or not the UK remains in the EU. This uncertainty might deter investment in the UK, but could also provide opportunities to invest for the longer term.
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 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 buying opportunities within what we believe will be an overall future trend of rising markets.
For all the talk of austerity, the country remains massively in debt and the real cuts in public spending are yet to come.
We continue to favour equities, property and absolute return funds over fixed interest, with a preference for Japan and Asia over a politically and economically unstable Europe. We have added a further absolute return fund to the stable, keeping capital ready for opportunities as they arise.
Underweight fixed interest
We have a general underweight bias to fixed interest funds. On our lower-risk portfolios that require exposure to the sector, we are holding a blend of government, investment grade and some high-yield bonds, as well as a fund where the income will adjust broadly in line with changes in interest rates. Although fixed interest funds have performed well this year, we prefer the higher income on offer from commercial property and the longer-term gains offered by equities.
Favouring Japan and Asia over Europe
We continue to favour Japan and Asian markets over Europe, where political and economic instability looks set to continue. Japan's monetary stimulus and the rally in the Nikkei reinforce our conviction in the region.
Building the absolute return allocation
We remain overweight in absolute return funds and have added a further fund to the stable. These funds offer a low-volatility alternative to cash, but with a higher return, and allow us to keep funds ready to put back into the market as 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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