The standout performers were European and Japanese equities which climbed by 15% and 10% respectively, although a weaker Euro eroded some of Europe’s gain for sterling investors.
The sharp decline in the oil price continues to feed into low global inflation figures. This is helping to boost consumer confidence, particularly in the US and UK, where inflation is now 0%. This has helped the emergence of real wage growth which is an encouraging sign of further economic recovery. The economic environment of both the UK and US certainly reflects the need for more ‘normal’ interest rates, but deflationary pressures have caused the Federal Reserve and Bank of England to delay any action.
Excessive regulation of banks following the financial crisis in 2008 has led to unprecedented loose monetary policies across the developed world. These policies are alternatives to banks for accessing credit but are leading to explosive growth in ‘shadow banking’. So far central banks have got away with delaying raising interest rates as loose monetary policies have more or less offset the reregulation of banks. However, if ‘shadow banking’ grows even more rapidly, the outcome will be unpredictable.
In the UK, the FTSE 100 finally broke through the psychological barrier of 7000 points, despite ongoing political uncertainty leading up to the general election in May. The FTSE gained over 4% this quarter, which was driven largely by the quantitative easing in Europe, as well as more encouraging UK economic data. George Osborne stated in his annual budget that the claimant count is at its lowest since 2008 and the number of people in work is at an all-time high. However, business investment declined for the second successive quarter and, in February, recorded the biggest decline since 2009. Furthermore, sterling strength against the euro has frustrated exporters and thus harmed company profits, which has been reflected by a noticeable pickup in profit warnings in the last few months.
The US economy continued to surge ahead this quarter as job creation accelerated further and growth data remains strong. However, equities were virtually unchanged in Q1 as many investors anticipate an interest rate rise in the summer following the Fed’s meeting in March. However, due to the strong dollar, sterling investors saw a gain of nearly 6%. The strong currency is a cause for concern for US companies with significant exports as they are likely to continue to experience a squeeze on profits as exports decline.
The injection of greater than expected stimulus of 6o billion euros per month into the economy by the European central bank has boosted European equities after a sluggish 2014. Doubts over Greece’s future as part the Eurozone once again emerged this quarter as negotiations over debt repayment continue. However, the economic picture in Europe is generally improving, with business activity at a four year high, consumer confidence at an eight year high and countries such as Spain upgrading their growth forecast for this year.
European stocks which have the majority of their production costs in euros and significant earnings in dollars have brought particularly strong returns to investors. The weak euro has aided competitiveness of European exports which is helping to support GDP growth.
China’s GDP growth is expected to be 7% this year, down from 7.4% last year; its lowest level for more than two decades. The central bank has lowered interest rates twice since November in an attempt to stimulate the economy. The president announced that China is entering ‘the new normal’ and will continue to provide Asia with growth opportunities. This is seemingly a way of lowering growth expectations of the economy for the coming years.
Japan came out of recession in the final quarter of last year, but an economic recovery has been subdued due to sluggish consumer spending and business confidence. As a result, and with the oil price keeping general prices low, there has been pressure on the central bank to expand its monetary policy. However, the unemployment rate has fallen to 3.5%, which is close to ‘full employment’, and deflationary pressure has encouraged real wage growth which will help stimulate domestic demand. Japanese equities have performed very strongly this quarter, returning 15% to sterling investors. Although approximately 1/3 of this gain was due to the weakening of sterling against the yen.
Emerging market economies have been experiencing mixed fortunes since the oil price crashed. India continues to thrive on the back of Modi’s business friendly policies, while Brazil and Russia have been left behind. Unlike Asian emerging markets which are benefiting from low commodity prices, Brazil and Russia have been badly affected as the oil and gas sector is a significant contributor to their exports and government revenues. Brazilian equities were particularly turbulent this quarter and the real fell by almost 20% against sterling, reflecting the challenges facing the economy. However, a strengthening ruble coupled with a good quarter for equities, meant sterling investors gained over 24% on Russian stocks in Q1.
China’s economic slowdown remains a downside risk to emerging markets and the strong dollar is a concern for emerging economies with significant dollar denominated debt.
Concerns over the fragility of global growth and the threat of deflation have helped strengthen the bond market through delayed expectations of interest rate rises. When rates do eventually rise, a sharp sell-off across the bond market is likely. We favour bond fund managers which have a flexible approach that enables them to target the small pockets of value available and be better positioned when monetary policy tightens.
At Seabrook Clark, we are cautiously optimistic about the global economy and equity markets. If the oil price remains low, we expect this to be a significant driver of economic growth both in the developed world and amongst Asian emerging markets.
As the US dollar continues to strengthen, we see limited short term growth for American equities, but remain optimistic about the strength of the economy. On the face of it, the economic backdrop is a promising one for UK equities, although, as with the US, valuations have become quite stretched based on historical averages. We currently favour the more defensive stocks which pay a good dividend and will benefit from greater consumer spending. As investors search for yield and move out of the bond market, we see this type of stock being a good investment in 2015. We are, however, expecting short term volatility leading up to and following the General Election on 7 May.
Sentiment over the Eurozone economy has been very negative in recent years, but there is plenty of scope for positive surprises. However, it is important that the huge stimulus program attempting to inject growth into the economy is underpinned by successful political reforms in order to facilitate long term prosperity. Furthermore, the ongoing negotiations with Greece are likely to remain a headwind for markets.
The table below shows the performance of key global markets in local currency and UK sterling terms, including dividends re-invested between 1 January and 31 March and the full year (31 March 2014 – 31 March 2015).
|Market||Index||Performance 2015 Q1 (% change) GBP||
Performance 2014 Q1 – 2015 Q1 (% change) GBP
|Performance 2015 Q1 (% change) Local currency||Performance 2014 Q1 – 2015 Q1 (% change) Local currency|
|Eurozone||FTSE Europe Ex-UK||10.82||6.80||14.96||17.91|
|UK Gilts||FTSE All-Stocks||2.20||13.91||2.20||13.91|
Our approach is to help our clients benefit from attractive equity returns and target sustainable dividends from a diversified portfolio, on the basis of our diligent research and analysis to highlight interesting investment opportunities and mitigate risk as far as possible.
[Jonny Rusbridge, Seabrook Clark Ltd, 3 April 2015]
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.