Market News

Market Update - January

16/01/2015

Diverging fortunes and monetary policy

Outperformance of the US economy and end of the Federal Reserve’s government bond purchase programme helped drive the US dollar up and the US equity market to new highs in 2014. We expect the US to continue to lead the global economy through 2015, with UK economy also expanding. This should see central banks in these economies increase interest rates, although the deflationary impacts of the falling oil price has likely delayed these rises. Conversely Europe and Japan are struggling to generate sustainable growth, and we expect easing of monetary policy in these regions.

Lower oil prices: good or bad for the world economy?

Brent crude oil ended the quarter at $51/barrel, a $37 drop below its starting point at the beginning of October. We estimate that the drop implies a boost to global growth of around +0.5% and a reduction in inflation in 2015 of about -1%. Lower oil and energy costs act like a tax cut to consumers and could provide a welcome boost to spending and growth. Financial market reaction so far suggests that the world is headed in a more deflationary direction, with equity markets and bond yields both declining. Debate continues around whether the benefit to consumption and growth will be removed by the energy industry cuts to capital expenditure. Nonetheless, we believe the benefits are set to outweigh these factors.

Implications for markets

Equities remain our favoured asset class, and we continue to see potential for earnings growth. Geopolitical risks and inherent volatility within Emerging Markets and disappointing economic data within Europe reinforce our preference for the UK and US, although we recognise that current valuations reflect the economic differences. We are also cognisant of election uncertainty on the horizon, which could add to UK volatility. Stronger corporate earnings should support property rental growth, following on from the yield compression seen in 2014.We remain cautious on bonds, which are susceptible to interest rate rises and are trading at unattractive valuations for medium to long-term investors unless the economy enters a period of deflation, an outcome that we do not expect. We prefer to hold absolute return strategies within portfolios where appropriate.

 

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 john.clifton@cazenovecapital.com