Global growth slowed more than expected from an annualised rate of 3.9% in the second half of 2013 to 2.7% in the first half of 2014. Although growth is forecast to improve, it is susceptible to many downside risks.
The extent to which the repercussions of the Scottish referendum will be felt on the UK economy remains to be seen, but for now, the main concern on the economic landscape is issues surrounding the nature of the Eurozone recovery. Although the UK economy itself looks to be in a relatively good place, undoubtedly markets will be watching carefully into 2015 as the election draws nearer and we wait on a response from the central bank. The steep decline in global market sentiment caused the FTSE 100 to fall by over 5% in the first couple of weeks of October, but a strong second half of the month left stock prices virtually unchanged.
The US market experienced similar volatility this month, but has performed more strongly than the FTSE in recent weeks, finishing up by almost 4%. This gain was magnified for sterling investors due to the strengthening of the dollar. October saw the end of the Fed’s Quantitative Easing (QE) bond buying programme, which had been in place since 2008. Despite signs that global economic growth is slowing, the Fed remains confident that domestic growth will continue. In fact, at the end of October, the US posted better than expected data which showed the US economy grew at an annual rate of 3.5% in the 3rd quarter of the year, raising fears that an interest rate hike could be sooner than expected. US unemployment has fallen consistently but, like the UK, wage growth remains hard to achieve. This has allowed Janet Yellen to retain a dovish stance on monetary policy.
The European economy has continued to struggle this month. German business confidence has fallen to its lowest level in almost two years, raising concerns about the strength of Europe’s largest economy. In contrast to the US, the ECB has started a new bond buying programme in the hope that it will boost lending, raise inflation and revive Eurozone economic growth, which has helped the equity markets. However, in addition to a loosening of monetary policy, it is clear that labour market reforms and deficit reductions are indispensable to any form of Eurozone recovery.
Asian economies have been affected by China’s recent economic slowdown, however, better than expected GDP data came out this month which helped push Chinese equities 4% higher. The World Bank has urged China to cut its ambitious growth target and, instead, focus more on reforms in order to increase its growth potential. The Japanese market had a very volatile month, falling as much as 10% in the first couple of weeks, following news that both consumer spending and inflation had fallen and unemployment had risen in September. However, Japanese equities actually finished 2% higher in October, which was largely due to the fact that markets reacted strongly to the surprising increase in QE. The added economic stimulus has been implemented in the hope of fighting off the threat of deflation and boosting consumer sentiment. A devaluation of the Japanese Yen has, however, eroded some of this gain for a sterling investor.
The MCSI Emerging markets index climbed by over 2% this month as stocks reacted strongly to Japan’s surprise QE and positive US economic data. However, the Russian economy, reliant on oil revenues, continues to struggle and expected growth in 2015 has been downgraded following the contraction in oil prices.
Outlook
Following recent volatility, global equity markets have partially recovered in the last couple of weeks, but still face tough challenges, so we consider there is every reason to be cautious looking ahead to the end of the year and beginning of 2015.
Economic data from the UK and US has been encouraging, which means questions are constantly being asked over when the central banks will respond with an interest rate rise. The recent positive US data has undoubtedly brought market expectations of a monetary response forward. Investors will no doubt remain cautious over the global economic recovery following the slowdown of China’s growth, the end of the US’ QE programme and a dollar that continues to strengthen. There will now be a greater focus on the ECB’s measures to stimulate European growth and whether Mario Draghi will be able to implement conventional monetary stimulus as seen in the US over the past six years.
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.