Market Commentary 2015 - Quarter 1 May 2015

Market Commentary 2015 - Quarter 1

The first quarter of 2015 was very positive for the majority of fixed income, property and equity markets. Interest rate/monetary policy seems to have been the main driver, causing some rotation within equity markets and the question now seems to be how long this might continue.

After the strength of 2014 and the start of 2015, investors have shown signs of moving away from the US equity market with perceived high market valuations cited as a key reason, particularly in light of the anticipated rise in interest rates. Economic growth remains reasonably strong and the US dollar is the currency of choice at present, performing very strongly relative to other major currencies. This may actually make things more difficult for US companies trading overseas, which is starting to be recognized by investors and may cause market fluctuations.

Expectations for the first UK Interest rate rise continue to be pushed back with very low inflation a key contributor. This should benefit the UK consumer plus overall economic growth remains good and any improvements in Europe will also be a positive due to the strong trading relationship. The big uncertainty on the horizon is the election in May with no indications of a clear result, which is negative for any immediate planning at business level. Markets may continue to worry about the result until the election is over, and may continue to worry about the result afterwards.

The injection of QE into the European economy has had an immediate impact on equity markets with investors becoming more positive on the economic outlook and the outlook for European businesses, as the much weaker euro is expected to translate into much better trading conditions. Currently weak economic growth and deflationary pressures remain issues but the worst may be already over and markets could continue to react positively over the coming months.

Asian and Emerging Market equities continue to look attractively valued both on an absolute and relative basis but with different countries at different stages of reform and development it remains important to be selective in choosing which stocks, sectors, countries and currencies to invest in. China continues to be a large influence on these markets/regions and with growth expected to slow further through 2015 and into subsequent years this will have both positive and negative impacts throughout the regions.

European QE has pushed many parts of the core government bond markets into negative yield territory, meaning they have now become even more of a return of capital/safety trade than before. This programme is scheduled to last until at least September 2016, so these negative yields may last for some time and may lead to yields contracting further in European peripheral government and European corporate bond markets. Investors still expect UK and US interest rates to increase but the longer rates stay at current levels then the longer it is likely that longer-dated assets will continue to outperform. The slightest hint of earlier interest rate rises may significantly spook markets, so the risk/reward suggests lower than average government bond exposure within portfolios. Conventional fixed income strategies may struggle over the next couple of years with flexibility likely to be the key to generating decent returns. 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 1 2015

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Independent Financial Advisors