Market Commentary - 2013 - Quarter 1 April 2013

Market Commentary - 2013 - Quarter 1

The first quarter of 2013 saw a continuation of the stock market performance seen towards the end of 2012 with strong returns across most equity markets, although momentum started to slow towards the end of the quarter. The beginning of 2013 saw a partial resolution to the US fiscal cliff, which had been concerning investors and had led to underperformance from the US stock market in particular. This removed one of the perceived headwinds to global stock markets and followed on from the reduction of risk in Europe and the relatively smooth changes to the leadership in China.
Levels of global economic growth remain below trend and this is expected to continue for some time but there are pockets of optimism. Data from the US remains broadly positive, particularly from a consumer perspective with unemployment, housing and retail sales data continuing to improve.

In Japan, changes to the country’s Prime Minister and governor of the Bank of Japan together with the implications for policy change was very positive for the country, and the third quarter of 2012 is looking increasingly like the bottom of the recent economic growth downturn in China.

Problems remain in Europe with low / no economic growth overall and a disconnect between the stronger ‘core’ European economies (it is increasingly looking like Germany is alone in this category with France and Italy weakening) and the weaker peripheral European economies (Spain, Greece, Portugal). The UK is faring little better, as growth also remains relatively weak, inflation has not been tamed and government debt levels are expected to fall much more slowly than originally anticipated.

Central banks continue to be relatively active with the Bank of Japan the latest to be linked with a significant monetary stimulus programme. This follows continued efforts from the US Federal Reserve, with their monthly purchase of US Treasuries and Mortgage Backed Securities, together with on-going, but not additional, Quantitative Easing from the Bank of England and the possibility that Mario Draghi and the European Central Bank will introduce further monetary policy as and when required. This means liquidity is likely to remain abundant.

Investing within the current economic and investment environment is difficult, particularly within equity markets, as the perceived benefits or disadvantages of particular monetary, fiscal and political policy is not easy to decipher. For example, if the US Federal Reserve were to reduce their Quantitative Easing programme, is this a positive thing due to the likelihood that economic growth is deemed to be strong enough to manage with this reduction, or is this a negative thing due to the reduction of liquidity in the system, which has helped drive equity markets? Similarly, if the ECB were to introduce more Quantitative Easing, is this a positive thing due to the added liquidity this will provide and the support this would provide for beleaguered economies or is this a negative thing - an admission that current conditions are extremely difficult and economies are struggling to survive?

As always, the valuation of a particular asset class provides a good starting point for determining the likely future longer-term returns but the current economic and political environment means that there will be shorter-term volatility and different times when ‘safe-haven’ and ‘risk’ assets will outperform.

Market commentary provided by Rayner Spencer Mills – Quarter 1 2013

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