Market Update - December
The decline in commodities
Commodities have suffered sharp falls over the last three years, with base metals down 20%, gold prices falling 35% and, more recently, oil collapsing by 40%. This dramatic reduction in the oil price has heightened volatility in markets. The weakness could be attributed to excess supply, most notably from the US shale oil revolution and the lack of response from OPEC (the Organisation of the Petroleum Exporting Countries) to cut production and support the price. Equally it could result from a lack of demand from emerging markets. None of these factors seem likely to change in the short term, meaning that we believe weak oil prices are likely to persist.
Lower oil price, weaker inflation, stronger growth?
The fall in oil prices is a help for commodity importing countries and a hindrance for commodity exporters. Consumers, particularly in the US, will be the biggest beneficiaries and are expected to increase spending, providing a boost for global GDP growth. Lower inflation is also likely to delay interest rate rises in the stronger economies of the UK and US and enhance the likelihood of monetary easing in weaker regions, such as the Eurozone and Japan.
The UK equity market is sensitive to oil price falls, with the Oil and Gas sector representing 12% of the index. This has meant that the UK index has underperformed global markets, although should be supported by relative valuations from here. The US continues to be the main driver of global growth, as evidenced by the recent strong corporate earnings season. We have a preference for US equities, but are mindful that valuations are expensive. We have less enthusiasm for European equities, which continue to disappoint in terms of corporate earnings, despite attractive valuations and expected European Central Bank action. Bonds have benefited from weaker inflation expectations as anticipated interest rate rises in the US and UK move further into 2015. We recognise that these factors may continue to be supportive, but struggle to find value in bond markets for long term investors. Property and absolute return remain our favoured alternative investments with the former generating an attractive income and the latter providing a useful buffer to equity market volatility.
For further thoughts on 2015, please read our strategic and market outlooks on Property, Global Equities, UK Equities and Multi-Asset investment.
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