Market Update - February
The fall in markets in January, although disappointing, was not unexpected. After such strong returns in 2013, we are likely to see more volatility this year. With uncertainty over the tapering of quantitative easing and emerging market growth we should expect to see down months as well as up, and both were factors in January. The Federal Reserve initiated ‘tapering’ by reducing the amount of liquidity that it injects into the monetary system by $10bn every month. As this stream of liquidity diminishes, emerging markets are being judged as the most vulnerable and this has been exacerbated by unflattering growth numbers from China.
Economic recovery continues
Although the emerging economies are looking more vulnerable, economic growth figures in both the US and UK have continued to strengthen. The US gross domestic product growth of 3.2% for the fourth quarter of 2013 was impressive, and the sharp fall in unemployment in the UK to 7.1%, the return of inflation (CPI) to the 2% target and much better momentum in broader UK economic activity are all positive developments. Despite this, the market’s undivided attention has been focused on quantitative easing which has driven share prices lower. We would counsel investors to see through this short term volatility and focus on real economic growth.
Favouring developed equity markets
Despite this volatility we still believe that equity markets in the developed markets are attractive. Although valuations are no longer ‘cheap’ following the price/earning expansion of 2013, earnings growth should be constructive for equity markets in 2014. On the flip side, valuations in emerging markets are becoming more attractive, but we still feel it is too early to increase our exposure. Bond yields remain unappealing and cash rates low and we continue to utilise low volatility absolute return approaches to diversify our clients’ portfolios where appropriate. We also favour an allocation to property given the attractive yields available and potential for modest capital growth
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