Market commentary: Quarter 3 2016 December 2016

Market commentary: Quarter 3 2016

The UK economy deteriorated in the third quarter, but not as much as feared. Early signs suggest that the housing market has cooled and business investment has weakened. However, the manufacturing sector has held up well so far, helped by a weaker pound.

Despite this encouraging short-term data, the authorities are clearly still in a cautious mood. The Bank of England loosened monetary policy further, cutting base rates to a new all-time low of 0.25% and announcing an expanded asset purchase programme.

Euro zone data showed little impact from the Brexit vote, but concerns continue to grow of Eurosceptic parties gaining traction in other countries. At their September meeting, the European Central Bank kept monetary policy unchanged. Markets were disappointed that the bank did not announce a near-term extension of its quantitative easing programme.

In the US, data continues to be relatively strong, particularly in the labour market. Inflation pressures are gradually building, but the Federal Reserve is waiting for further evidence of upward price pressures before raising interest rates again.

Elsewhere, the Bank of Japan announced a change to its asset purchase programme. The programme now has two targets: the 10-year government bond yield and an inflation overshoot beyond 2%. Despite this new overshoot target, headline inflation fell to -0.5% year-on-year in August.

The downturn in emerging-market growth eased in Q3 following a pick up for commodity-exporting economies such as Brazil and Russia.

Finally, Chinese data picked up over the quarter as recent economic stimulus measures started to take effect. The recovery is largely consumer-driven. However, high levels of debt and poorly allocated credit point towards increased underlying financial risks.

KEY TAKEAWAY

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 very difficult to time these changes effectively.

In practice, shifting your portfolio in response to short-term events may lead to little more than increased trading costs.

We believe that investors will usually be better served by identifying the appropriate asset allocation to suit their goals, then sticking with it and tuning out short-term noise.

Market commentary provided by Vanguard – Quarter 3 2016

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Independent Financial Advisors