Market Commentary 2014 - Quarter 1 May 2014

Market Commentary 2014 - Quarter 1

Since our January review, momentum of world equity markets has certainly slowed with January and February cancelling out each other in terms of market movements, and March seeing little change.
At the start of the year, we felt we would need to see earnings growth at a company level before markets could move forward, but so far the evidence for this has been patchy.

This uncertainty for investors has been exacerbated by other events around the globe, some of which were already on our worry list – including declining financial stimulus, as quantitative easy (QE) reduced, and a broadening of the slowdown in China – but others were unexpected events such as those in Crimea and the Philippines.

There is some evidence that investors have become more defensive since the start of the year as bond yields have remained lower than expected and gold has seen some strength returning. This is to be expected as financial markets have been on a long bull run and many risk assets are now showing signs of being fully valued, particularly in developed markets.

It is worth putting the situation into a longer term context to be able to understand what is currently happening and what we expect to happen for the rest of 2014. The 2008/09 recession caused by the Global Financial Crisis was not a typical business cycle downturn. It was a balance sheet recession, caused by too much borrowing. It occurred at a time when equities were less obviously over-valued than many other asset classes and this over-valuation of other asset classes ended up impacting negatively on equity markets and deepening the economic downturn. As a result of this unconventional economic downturn, developed economies have adopted highly unconventional monetary measures to offset the rolling de-leveraging that followed. The global economy has had to withstand de-leveraging first in the corporate and personal sectors and now more recently in the government sector.

It is now over five years since the US Federal Reserve (FED) adopted its zero interest rate policy and subsequent quantitative easing (QE). These measures have been followed, at different times and with different degrees and emphasis, by central banks in the UK, Europe and Japan. This unprecedented monetary expansion has coincided with a strong recovery in equity markets - the US stock market is now up over 170% from its lows in 2009.

The central banks hope to unwind policy measures slowly, however this may be a more difficult exercise to manage smoothly than market participants believe and in this environment investors too would be well advised to proceed with some caution. Whilst further equity gains are in prospect, the strong valuation support of previous years is no longer present - the US remains the world’s dominant equity market and here shares are on the wrong side of fair value. There have also been some signs of excessive risk taking in investor behaviour, as demonstrated by some frothy recent IPO valuations such as AO World and King Digital Entertainment (the company behind Candy Crush Saga). As a result the path to higher share prices is likely to be more challenging in 2014 than was the case in either 2013 or 2012.

In summary, whilst we do not see the global recovery being undermined in 2014 we do feel that any gains made will be hard won and based more on fundamentals than speculation. 

Market commentary provided by Rayner Spencer Mills – Quarter 1 2014

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Independent Financial Advisors