Market Commentary 2015: Quarter 2 August 2015

Market Commentary 2015: Quarter 2

The UK economy continued its recovery in the second quarter (Q2). However, growth is looking somewhat unbalanced, with a strong services sector contrasted by weakness in manufacturing. Moreover, the government has pledged to eliminate the budget deficit, and this may result in tax hikes that will put renewed pressure on economic growth.
Against this backdrop, the Bank of England is keeping interest rates on hold for now, with the first hike not expected before early 2016.

In Europe, strong consumer confidence and a weaker Euro helped to drive a modest recovery in growth, despite the ongoing Greek debt crisis. Widespread uncertainty about Greece’s future in the Euro had severe implications for the Greek financial system, leading to substantial capital outflows.

The US economy is likely to have rebounded in Q2 after a slowdown in Q1. Meanwhile US inflation is likely to increase over the coming months as the impact of previous energy price declines dissipates. This makes an interest rate increase likely sometime this year. However, both the timing and extent of forthcoming rate increases remains uncertain, with the authorities eyeing growth data and the strength of the dollar closely.

Chinese economic growth now looks likely to miss the target of 7% for 2015 and inflationary pressure is muted. This means that monetary easing is likely to continue, with an ongoing focus on stabilising growth, restructuring the economy and containing financial risk.

Finally, the Japanese economy appears to have stalled in Q2 and is likely to come in at around 0.9% for 2015 as a whole. Additional stimulus is likely, but it might not come until late 2015 or early 2016 and we expect inflation to stay below the Bank of Japan’s 2% target.


What should investors do in response to these developments?

Many investors change their portfolios in a bid to take advantage of the latest news. However, it’s hard to time these changes effectively and, in practice, shifting your portfolio in response to short-term events may lead to little more than increased trading costs.
In many cases there is not even a clear link between economic news and market performance.
This simple fact illustrates the importance of staying disciplined rather than reacting to any short-term developments.

Market commentary provided by Vanguard – Quarter 2 2015

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