Market Commentary 2014 - Quarter 3 November 2014

Market Commentary 2014 - Quarter 3

The third quarter of 2014 has left us with a mixed picture of economic data and market direction after a period when both bond and equity markets have seen some positive gains. Surprisingly we have seen the gilt market produce strong returns after a period when most fund managers had expected the increasing pressure on central banks to increase interest rates, leading to a rising yield environment. This has not been the case as the threat to near term interest rate rises has receded and geopolitical events have led to the continued support of western government debt. The continued bond buying by central banks has also acted as a backstop to market demand reducing. One of the aims of QE was to support asset prices and this has been effective, particularly in the US. To a certain degree this has led the market to front run the economic data, and prices for companies can be generally thought of as either overvalued or fair valued but certainly not cheap. There is selective value in individual stocks and some sectors but the opportunities are limited unless we see more economic evidence that earnings are improving at a greater rate than at present.

The ending of QE is likely to cause volatility but not in the way that we saw when it was first announced in May of last year. Whilst US treasuries will have to find new buyers, other economies such as Europe and Japan may step in to aid global liquidity. The US central bank does not want to over tighten in this environment so interest rate rises still look some way off in the US, but more likely in the UK. The threat of a policy mistake in this environment is more likely given the tools available are still quite blunt. It is likely however that the next move in rates will be upwards and the question for the equity market is whether this will cause a modest re-rating from which markets can recover off the back of gradual gains in profitability. If this is the case then we are likely to see a slow growth environment for some time to come.

Inflation, another area of concern, has generally been subdued, helped by the slow increase in wages despite an improvement in employment numbers across western markets. In some ways the threat of deflation has increased, particularly in Europe, which has seen some additional measures put in place to counteract this influence.

There are not yet the obvious imbalances to bring this current economic upswing to an end. Inflation is not yet a problem anywhere in the world, so there is no real necessity for Central Banks to tighten aggressively with the aim of slowing economic activity. Current account imbalances have improved in recent years, especially in the States. Although there is talk of bubbles, there is no real sign yet of clear financial excesses, with even government bonds supported to some degree by the likely lower level of Central Bank interest rates during the current cycle peak. Corporate earnings look set to grow in the region of 5%-10% and there has been repair to the banking system, even in Europe. In the States the strength of the banking system is allowing lending standards to ease, helping the SME sector.

Overall the central case is for the recovery in the global economy to continue into 2015 and 2016, although the pace of this is likely to remain uneven. This does of course assume that there is not an external shock.

Market commentary provided by Rayner Spencer Mills – Quarter 3 2014

See all articles from 2014 >

Independent Financial Advisors