This represented eight consecutive weeks of gains. American shares were buoyed by impressive third quarter GDP growth of 2.8% and strong employment data. The increased economic confidence in the US was also reflected in the US housing market, with building permits at a five year high and house prices up over 11% year on year, the fastest rise since 2006.
The equity markets in continental Europe also performed well in November, rising over 1%, although this translated into a decline of 0.6% for UK investors due to sterling’s strength against the euro. European markets were boosted by a cut in interest rates to a new historical low of 0.25% from 0.5% to help stimulate growth and avoid deflation. The European Commission has cut its 2014 growth forecast to 1.1%, down from 1.4% at the start of 2013. Inflation or rather lack of it is a worry too, which is currently just 0.7%, as is youth unemployment at a new high of 24%. Good news however emanated from Germany, where Angela Merkel, German Chancellor, agreed to form a coalition with the centre-left SPD and German business confidence was recorded at its highest level since May 2012.
The UK equity market drifted lower by around 1% in November as ‘good news was bad news’ for investors. Economic growth looks to be picking up in the UK, which should accelerate the fall in unemployment to 7%, potentially to the second half of 2015 rather than 2016. Together with a benign inflation outlook, this could mean that Mark Carney, Governor of the Bank of England, will move to increase interest rates sooner than currently expected. There was also an announcement amending the Funding for Lending Scheme, so banks will no longer be able to tap cheap capital for residential mortgages in an attempt to avoid a possible housing bubble. This announcement hit housebuilders; utilities also continued to struggle with concerns regarding political moves to cap prices.
The Japanese equity market benefited from yen currency weakness, rising 5.4% in November, although sterling’s rise of over 6% against the yen wiped out this gain for a UK investor.
Chinese equities performed strongly in November following the announcement of welcome reforms at the Third Plenum. The new policies included a bigger role for markets in the Chinese economy and the easing of the one-child policy. Other Asian markets struggled in November, partly on concerns regarding the tapering of the US economic stimulus (QE), and slowing growth in Indonesia, civil unrest in Thailand, fallout from Typhoon Haiyan in the Philippines, and renewed economic worries in India.
Global bond markets were characterised by two opposing forces in November. The signs of economic recovery in both the US and UK put pressure on bonds as investors considered it likely that economic stimulus will be tapered sooner rather than later and investors are increasingly willing to increase their exposure to risk assets. On the other hand, continued economic weakness and the interest rate cut in the eurozone provided support in November for domestic bonds.
Outlook
Our view is that equity markets should benefit as the global economic recovery takes hold over the medium term, providing central banks do not move too quickly by increasing interest rates thereby stifling growth.
We continue to monitor the level of public and private debt, as well as the financial strength of banks, which remain in our view in many cases under-capitalised. The future of the Eurozone and US government finances are also causes for concern.
Markets will react quickly to any signs that the US economic stimulus will be tapered sooner than expected on positive economic news. It will require skill on the part of central banks to balance the withdrawal of QE in due course with the maintenance of market stability.
Reports of the withdrawal of QE will add to market volatility and could depress returns over the short-term, which should create some attractive buying opportunities for equities as investors continue to reduce their exposure to bond markets.
[Matthew Clark, Seabrook Clark Ltd, 10 December 2013]
Please note, our Investment Commentary is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.