Market Commentary 2014 - Quarter 2 September 2014

Market Commentary 2014 - Quarter 2

After a relatively difficult start to 2014 the second quarter saw rotation within and across markets and asset classes with many investors caught out by the speed of this change. The strength of economic growth in the US and UK has helped to drive those markets higher. Investors remain concerned about valuations (on some measures) of the US market relative to history and relative to other markets, but it is encouraging that many companies have demonstrated the ability to grow their earnings to justify these valuations, although companies that have missed earnings targets have been hit hard. This provides an environment where good stock selection can add significant value to a portfolio.

The recent shake-out in the medium-sized and smaller companies areas of the UK market has arguably provided fund managers with a good opportunity to purchase stocks with strong fundamentals on improved valuations, again placing an emphasis on strong stock selection skills to add value. With the UK economy and companies facing a gradually rising interest rate environment at some point in the near future, a company’s ability to produce sustainable growth will be tested.

Economic momentum within Emerging Markets and Asia has been improving but different countries are at different stages of reform and development, so it remains important to be selective in choosing the stock, sector, country and currency exposure within a fund or portfolio. Active managers have historically been able to add significant value in these higher risk markets and this should continue to be the case going forward.

In all markets, it is important that individual companies demonstrate the ability to generate earnings growth, as this is likely to be the greatest driver of share price performance in the short to medium-term.

The performance of fixed income markets in the first half of 2014 has surprised many investors with the ‘safe haven’ developed government bond markets in particular performing much better than expected given the increasing likelihood of rising interest rates in the near term (US and UK). Whether this can continue is currently the subject of much debate. Credit markets have continued to outperform but they will undoubtedly be affected by any negative moves in government bond markets. The direction of interest rates and to what extent bond prices reflect reality remain important factors for investors and it is likely that volatility will continue as markets try to digest every piece of economic and policy news. Conventional fixed income strategies are likely to struggle over the next couple of years with flexibility likely to be the key to generating decent returns. Overall, government bond and high quality credit markets are not overly attractive and the spread (extra yield over government bonds) available from the high yield market is offering increasingly less value, so we continue to favour strategic / absolute return strategies where managers can use a variety of techniques (duration, currency, yield curve etc.) plus their stock picking skills to generate superior returns. 

Market commentary provided by Rayner Spencer Mills – Quarter 2 2014

See all articles from 2014 >

Independent Financial Advisors