One false market replaced by another
October reminded us that markets have a talent for confounding expectations. We had been waiting to see how markets coped without the Federal Reserve's hand-holding, but the Bank of Japan's surprise stimulus thwarted that experiment. Japanese stocks rallied by over 8%, though the falling yen reduced this in sterling terms. The FTSE endured its customary autumn volatility before recovering, government bonds ended the month 1% higher, and the yield on ten-year gilts briefly dipped below 2%. As global inflation continues to fall, the starting date for any rise in interest rates is moving further away.
The Bank of Japan takes centre stage
As the Federal Reserve's quantitative easing programme drew to a close, the Bank of Japan snatched the baton from a dithering ECB. The Japanese central bank surprised markets with a new stimulus package targeting purchases of longer-dated bonds and global, as well as domestic, equities. Japanese stocks rallied by over 8%, although the falling yen reduced this rise in sterling terms. Together with the pro-equity asset reallocation of the Japanese pension fund, this could give a further boost to risk markets.
The ECB, meanwhile, announced the results of its stress-test on European banks. Sufficient banks had failed the test to lend credibility to the exercise, though remarkably none of the scenarios included a test for deflation in the eurozone. The ECB has declared its hand but characteristically has not yet supported its rhetoric with actions. Unfortunately, as before, this means second-guessing somebody else's buying intentions rather than paying attention to the fundamentals.
Election uncertainty and the UKIP factor
The fundamentals remain mixed. Growth in the US and UK remains positive, but nagging doubts persist over the lack of wage growth and the mountain of outstanding debts. There is a danger that the further deterioration of growth across the eurozone begins to impact on the UK economy. This, combined with uncertainty approaching next year's general election, could lead to businesses putting investment intentions on hold.
Although the UK general election is still six months away, UKIP's success in the Clacton by-election has brought a new level of uncertainty to British politics. If Farage gains momentum in this month's Rochester & Strood by-election, this will increase the likelihood of a referendum on EU opt-out in the near future. That would bring into question the likely impact on growth and how both the country's currency and debt should be valued as a more isolated economy.
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
Expensive bonds may remain expensive for longer
As global inflation continues to fall, the starting date for any rise in interest rates — in both the US and UK — is moving further away in 2015 and is currently getting closer to 2016. This might mean that expensive bonds remain expensive for longer as the search for yield continues. We had been waiting to see how markets coped without the Federal Reserve's hand-holding, but the Bank of Japan's surprise intervention has replaced one false market with another, and the jury remains out on the ECB as the third.
The fundamentals remain mixed. Growth in the US and UK is positive, but the lack of wage growth and the mountain of outstanding debts continue to nag. Across the eurozone, the further deterioration of growth raises the real prospect of a drag on the UK economy. Add the uncertainty of a general election now just six months away, and there is a credible risk that businesses defer investment decisions.
One false market has been replaced by another, with the jury still out on the third.
We continue to favour property and absolute return funds over fixed interest, and maintain an overweight position in Asia. Absolute return funds provide a low-volatility alternative to cash and allow us to redeploy capital when opportunities arise.
Property and absolute return over fixed interest
Our underweight fixed-interest view detracted slightly from performance in lower-risk portfolios, but we continue to believe that commercial property and absolute return funds offer better returns over the longer term. Absolute return funds serve as a low-volatility alternative to cash and allow us to put money back into the market when opportunities arise.
Asia and US exposure adding value
Our overweight exposure to Asia once again added value, rising by around 4%. Our US fund also rose by a similar amount, benefiting from the continuing strength of the American economy.
Gold under pressure from a strong dollar
The strong US dollar caused gold to sell off, with a consequent 10% fall in our gold fund. We are mindful of the headwind a strong dollar creates for commodity-linked holdings.
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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