Market News

Market Update - February

12/02/2015

Careful what you wish for…

Investors have welcomed the decision by the European Central Bank (ECB) to launch sovereign Quantitative Easing (amounting to the ECB buying €60bn worth of publicly-quoted and privately-held securities each month) and there will be benefits to the economy, primarily through a lower euro. However, this process of repurchasing is expected to create acute shortages of bonds in the region, and will further increase the financial repression of savers in the Eurozone and beyond. 

Lower inflation is only half the story

The oil price fall has reduced inflation expectations and added to investor anxiety around global growth, particularly in the emerging markets, where the weakness in commodity prices has been attributed to a worsening picture for growth.  Whilst we recognise the structural headwinds which challenge global growth, we believe that the consensus is not fully accounting for the benefits to activity from lower oil prices through real incomes and consumer spending. Indeed, the oil price fall is equivalent to a 2% pay rise for the average US consumer. 

Election uncertainty...

The Greek election result and subsequent attempts to renegotiate the terms of the country’s debt obligations adds to uncertainties in the Eurozone region.  These are particularly acute as Greece’s funding needs are estimated at Eur4.3bn by the end of March. Closer to home, our own election, scheduled for 7th May, is unhelpful for corporate investment in the short term.  A recent survey of company CFOs showed a significant decline in risk appetite, with the UK general election cited as the main contributing factor.

Market implications

UK equities have started the year positively, with good economic growth, strong employment data and a more stable oil price helping to drive returns. Eurozone equities have risen as investors seek to benefit from quantitative easing, a weak euro and attractive relative valuations. The US has seen more subdued equity returns, which is perhaps unsurprising given relative valuations and the earnings growth headwind provided by the strong dollar.  However, the US economy remains the global growth engine with attractive momentum and continued strong domestic demand. 

It is surprising that equity market volatility has not been greater, given the ongoing Greece debt debate and the situation in Ukraine.  This serves to highlight the demand for income producing equities in a low interest rate environment.  We do not expect this to change and retain our marginally overweight position.

Bond yields have fallen further, as expectations for interest rate rises in the UK are delayed due to reduced inflationary pressures.  We do not believe that we are entering into a deflationary environment and cannot find value in bond yields at these levels for investors with medium to long term time horizons.  However, European QE provides structural support to prices in the near term.  Further out, the anticipated gradual normalisation in rates will likely lead to capital losses in the bond market.  We therefore retain our underweight position, with a preference for property within portfolios for income generation and absolute return strategies for diversification from equity volatility.

 

Important information

The opinions contained herein are those of the Charity team at Cazenove Capital Management and do not necessarily represent the House View. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital Management does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital Management has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital Management is a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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Giles Neville

Giles Neville

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John Clifton

John Clifton

Business Development Manager
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