The Lowdown on Markets to 8th July 2016
World Markets at a Glance
In this week’s issue
- Global equity markets have become very unpredictable buoyed up by central banks.
- Every week the capital markets continue to set new records on huge sentiment swings.
- The question is asked “are both global equities and bonds now expensive” and exposed.
- Liquidity fears enter the commercial property market as trading suspensions take hold.
- Both economic and political themes are running through the markets creating variability.
- It is worth noting the technical analysis metaphor “the trend is your friend until the end”
“Equity markets enter a goldilocks period buoyed up by central banks”
Without doubt over the past few weeks the global equity markets have been very unpredictable, given their concerns over Brexit, the Feds decision on interest rates, Chinese economic slowdown and the price of crude oil. However, given the unexpected result of the European referendum the financial markets are now beginning to throw off a huge variance in their performances, especially in sterling terms.
Certainly since the Brexit vote the capital markets have been continually breaking records as global investor’s re-position themselves under the assumption that central bank policy is likely to remain loose for the foreseeable future, and therefore, continue to create huge sentiment swings within the many asset classes. Indeed, we have already seen the price of gold bullion rise by 28.0 per cent since the beginning of the year, and by US$160.0 a troy ounce since the end of May 2016. This in itself has led to some talk amongst gold buffs that this might be the beginning of a new bull market for the yellow metal.
“This might be the beginning of a new bull market for the yellow metal”
Arguably there does seem to be an unlimited upside for the gold price at the moment, given that the price seems to be more correlated towards sovereign bond yields and loose monetary policy, than the US dollar or inflation. But of course, this could all change once the investment climate for buying such low yielding sovereign bonds peters out, or when central banks begin to tighten.
None-the-less, given that the gold price has recorded its longest winning streak in two years, and that demand is relatively high from Asian investors, we could overtime see the metal test its all-time high in the not too distant future.
Moving on to the bonds markets, it has become fairly clear that since Britain voted to leave the EU we have seen sovereign bond yields repeatedly record new all-time lows, and this theme is likely to continue, given the bond buying panic we have seen from investors, and the continuation of bond buying by central banks. Similarly the weight of money finding its way into corporate bonds has been accelerating in recent weeks, which in turn, could create a bubble, or market threat, in the very near term, given the uncertain market liquidity for most corporate bond markets.
Indeed, liquidity fears have already entered the UK commercial property market which has led to seven of the largest UK commercial property funds announcing trading suspensions, or a devaluing of their fund pricing to stem redemption flows. This action appears to have locked in about £15.0 billion of assets that investors are unable to exit. A similar situation occurred in the asset class back in the Lehman crisis which then left investors rather reluctant to re-enter this market for some time but with income becoming difficult to find the yields on commercial property has once again become attractive and therefore this asset class has found its way back into many investor’s portfolios.
“Looking at the global equity markets it would now seem as if we have entered a goldilocks period”
Certainly looking at the global equity markets it would now seem as if we have entered a goldilocks period whereby they seem to be strong enough to withstand the headwinds from Brexit and Europe whilst benefitting from the knowledge that the central banks are still willing to come to their aid if the markets experience any future crisis.
Indeed, it is likely that we will see further quantitative easing from the likes of the Bank of Japan, now that Japanese Prime Minister, Shinzo Abe has secured a victory for his ruling party in the Upper House elections. Clearly, this victory should strengthen his position so that he can proceed with any reforms, including changes to the constitution, and of course, in Europe the ECB will continue with their monthly sovereign bond buying programme that now includes corporate bond purchases.
“It is likely that we will see further quantitative easing from the likes of the Bank of Japan”
Equally in the UK, the governing party has now chosen its next British prime minister, Theresa May, who has promised to build a “better Britain” and to make the UK’s exit from the European Union a success. This all means that Mr Cameron will now tender his formal resignation to the Queen after prime ministers question time on Wednesday.
Unquestionably, the next few months will be a critical time for the new prime minister, as she navigates herself around important issues such as the renewal of Trident, her first cabinet and prime ministers question time meetings, parliaments summer recess return, the conservative Party annual conference and her first European Council meeting as prime minister, notwithstanding the invoking of article 50 giving formal notice to the European Union that Britain wishes to leave.
“Janet Yellen, steers a careful course over the decision on whether to raise interest rates before the US presidential election”
Looking towards the United States, another important lady will feature heavily in the news over the coming months as the Fed chair, Janet Yellen, steers a careful course over the decision on whether to raise interest rates before the US presidential election, or waiting until she knows what the full ramifications will be for Brexit. Certainly, an interest rate hike, based upon the recent US economic data, could be justified, but with so many outside forces at work, and pockets of the US economy still rather frustrating she might defer the Feds decision until December or even to the first quarter of 2017.
Therefore, in respect to the equity markets they now appear to be experiencing a period whereby investors are prepared to add some risk to their portfolio’s, given that the S&P 500 Index has set a record high on growth optimism, emerging markets have gained some ground on loose monetary expectations, the Japanese market has risen on the election result, and in the UK the FTSE 100 Index has rallied into bullish territory after moving up by just over 20 per cent from its February lows.
“The FTSE 100 Index has rallied into bullish territory”
Certainly, these are irrational times given that we are continually seeing government bond yields trading lower, gold bullion trading higher, suggesting that we might have entered a new bull market for the yellow metal, and in the FX market we have seen sterling trading and levels last seen in 1985 whilst the yen has strengthened by over 25 per cent so far this year.
“This is a good time for active global investors that take tactical positions”
Clearly, this is a good time for active global investors that take tactical positions, based around the daily macro news, but it is also a dangerous time, if you find yourself on the wrong side of the trade, given that markets are whipsawing around very quickly. For instance, the turnaround in the markets pre-Brexit and post Brexit has been phenomenal and that is why the Investment Quorum strategy was not to participate in the confusion that led up to the European referendum vote, much better to have waited and benefitted from the subsequent uplift of the markets once the outcome was known and the subsequent overreaction on the 24th June 2016.
“The trend is your friend until the end”
Understandably, we have now entered some uncharted waters, both from an economic and political perspective, but with global equity markets showing some real downside resistance it just might be worth remembering the technical analysis metaphor “the trend is your friend until the end”, but of course, until we actually see a real big change in central bank policy, this goldilocks period in the markets might last for some time to come. However, as we have already experienced it has also become a real roller coaster ride for investors.
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .
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