Market Commentary – November 2014

Over the last month, we have continued to see a divergence in the pace of economic growth across different regions of the globe.

The UK and US continue to post promising growth rates, while China and major emerging economies have slowed and the Eurozone has stagnated. The MSCI World index increased by over 3% in November as investor sentiment appears to have returned following the sharp decline in global equities between mid-September and mid-October. Meanwhile, the price of oil has continued to fall, reaching a five-year low, impacting global markets.

The FTSE100 is back to approximately 6700 points after climbing 3% this month. The pace of UK growth remains robust despite evidence of recent a slowdown across a number of sectors, such as the housing and service industries. The UK unemployment rate has now fallen to 6% from 8% in 2010, however, there has been an absence of wage growth. This is largely due to the rise in underemployment, where workers have been forced to take jobs that have fewer hours than they would like. As a result, the unemployment rate for Q2 was 6.2%, whereas the underemployment rate was 7.8%; calculated by adding the extra number of hours workers would have been willing to work at the going wage rate [Bell-Blanchflower, 2014]. This is the equivalent to adding half a million people to the 2 million shown in the rate of unemployment. Consequently, in our view, as a result of an absence of inflationary pressure, both on prices and wages, it is hard see an interest rate rise in the foreseeable future. 

Underemployment Blanch.docx

Source: Bell-Blanchflower, 2014

The US economy expanded at an annualised rate of 3.9% between July and September, up from the estimated 3.5%. This is the strongest two consecutive quarters of growth in the US for a decade. This GDP data reflects another good month for US equities, which rose by 2.6%. Due to the increasingly strong US dollar, the return for sterling investors was magnified to nearly 5%. Like the UK, the US has been able to maintain a dovish monetary policy due to low wage growth, helping boost equity prices, but the Fed is under increasing pressure to raise interest rates as the economy continues to improve.

Despite more evidence this month that the Eurozone economy has stagnated, European equities increased by 3.6%. Stocks reacted strongly to Mario Draghi’s signal that the bank is ready to “step up the pressure” and expand its stimulus programs if inflation fails to quickly return to the bank’s target. However, Europe faces widespread downside risks and the ECB currently lacks the political capital to take the big decisions required to mitigate them. As a result, the problems facing Europe are of a huge concern for the global economy.

The Chinese economy continued to weaken in November as indicators showed manufacturing activity losing momentum, slipping to its lowest level since March. Concerns over China’s economic slowdown have been reflected by news of an interest rate cut this month. However, there are question marks over whether or not this will be enough to have a significant impact on benefitting the economy.

November revealed that Japan’s economy has slipped into recession, contracting 1.6% in Q3. The consumption tax seems to have been a significant contributor to the slowdown in GDP growth. In addition, national debt is now in excess of 240% of GDP and the government continues to run a deficit of around 8% of GDP per year. Japan is in need of sustainable real economic growth, which will not come from excessive quantitative easing, as seen last month.

Recently, emerging market economies have been affected by the slowdown in China’s GDP growth and the strengthening US dollar. However, the picture looks even bleaker following a sharp decline in the price of oil. Countries such as Russia have been particularly badly affected, reflected by a plummeting Rouble. The country’s problems have been exacerbated by overseas sanctions and investors are growing increasingly concerned over refinancing as Russia is all but cut off from capital markets. Brazil also continues to face difficulties. High inflation, weak growth and a government implementing unfavourable reforms for markets has led to a sell-off in sovereign debt.


We remain cautious over equities looking ahead to 2015 as the global economy faces many downside risks, which could lead to further volatility of financial markets. The ongoing trouble in a stagnant Europe and a slowdown in China’s GDP growth are certainly a cause for concern for global markets. The strong US dollar and sharp decline in the oil price will continue to influence global economies, particularly emerging markets.

Despite positive economic progress in the UK, we might expect a significant amount of uncertainty leading up to the general election in May and a possible referendum on EU membership in 2017. Market expectations of when interest rates might rise in the US and UK will of course continue have a bearing on shareholder sentiment as we approach 2015. In our view, we expect to see a rate rise in the US before the UK given current economic conditions.

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.


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