May 2014 Market Commentary

Throughout May, most asset classes experienced a welcome reduction in volatility.

With the majority of worldwide economic data indicators matching or in some cases exceeding expectations, the FTSE100 returned 0.94% with the FTSE World index returning 2.64%. The slight outperformance by the world index was aided by a reduction in geopolitical tensions.

Throughout May, most asset classes experienced a welcome reduction in volatility. With the majority of worldwide economic data indicators matching or in some cases exceeding expectations, the FTSE100 returned 0.94% with the FTSE World index returning 2.64%. The slight outperformance by the world index was aided by a reduction in geopolitical tensions.

In the UK, despite a slow-down in retail and wholesale distribution, markets were buoyed by sustained growth in manufacturing output figures. Falling unemployment continues to support market confidence with the jobless rate falling to its lowest level since 2008. Rising house prices remain a concern, particularly in the capital, which may spark a review of mortgage issuing practices. The Bank of England kept interest-rate and asset-purchase targets unchanged, however minutes from the latest Monetary Policy Committee meeting revealed a growing preference for accelerating anticipated interest-rate rises which we expect to occur early next year.

With the US earnings season complete, market focus returned to the strength of the economy and any announcements from the US Federal Reserve for which, chair Janet Yellen provided a welcome positive update on the outlook for the economy. Despite this, any forecast interest rate rise remains data dependent, and Yellen noted concerns over potentially slower job growth and weakness in the housing market as signals that interest rates may remain low for longer. As in the UK, a large driving force behind the economy was positive manufacturing data, with output increasing at its fastest pace in nearly three years, suggesting that economic growth should rebound throughout the second quarter.

Throughout May, European markets were dominated by the elections for the European Parliament, with anti-European sentiment particularly evident in the UK, with the UK Independence party gaining significant support ahead of the 2015 general election. Perhaps more surprisingly, the Anti-EU National Front in France gained 26% of the vote where eurosceptisism seems particularly rife. The rise of populist anti-Europe parties continues and will likely only be quelled once the slow moving economy finally begins to gain momentum. One factor which may aid economic momentum was the suggestion that the European Central Bank (ECB) would loosen of monetary policy at its June meeting to ward off further deflationary pressures. With first-quarter GDP growth at a disappointing 0.2% quarter on quarter, this could well see a negative deposit rate introduced.

In China, there were signs that the economy is continuing to stabilise after a stuttering year. April’s trade data saw a return to positive export growth. Fears surrounding a property bubble appear to be alleviating as Chinese authorities take action to mitigate some of the slowdown in the country’s property market. In addition, new pro-growth policies, such as tax breaks for small companies, were announced late last month.
Emerging markets had a strong month, outperforming the majority of developed economies. The MSCI Emerging Markets Index returned 2.9%, slightly ahead of the world index at 2.64%. With Petro Poroshenko elected as president in Ukraine, the crisis is showing tentative signs of improvement, with both sides close to a deal on gas and Russian troops slowly moving away from the border. Sentiment towards Russia was also boosted by the announcement of a 30-year $400 billion gas supply contract with China. Meanwhile, in India, markets added close to 8% in the month of May as hopes of economic revival soared following the election of Prime Minister, Narendra Modi.

Outlook

We expect markets to continue to stabilise throughout June. Although any further growth may be limited for the time being, we would welcome a sustained period of reduced market volatility.
Aside from any further sudden major Geopolitical issues, we would expect that the next obstacle for worldwide markets will be a reaction to changes in interest rates. With falling unemployment in the UK and the US, we expect interest rates may rise early next year.

Although tensions seem to be easing in Ukraine, we remain watchful of the situation and any escalation or further conflict could significantly affect markets as well as cause spikes in the price of oil.
In Asia, we expect the economy in China to continue to stabilise on the back of proactive measures by the government to increase business confidence. Following the election of Narendra Modi, Indian markets should continue to perform well in the short-medium term.

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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