Market Update - March
Global recovery is slow and bumpy..
After the fall in January, came the bounce in global markets in February and a rocky start to March. Alongside continuing volatility, we are likely to see a year of modest economic recovery in 2014. Much of the recent weakness in US activity can be attributed to adverse weather, although there is also an inventory correction weighing on activity. Recent central bank meetings suggest that the European Central Bank (ECB) and Bank of Japan are expected to continue with their loose monetary policies, whilst the Bank of England remains on hold. These accommodative policies suggest that risk assets should continue to benefit from liquidity and we remain overweight equities versus bonds, using low volatility absolute return products and allocations to property to diversify portfolios, where appropriate.
Emerging markets struggling but valuations more attractive…
Emerging markets face a number of potential economic hurdles from a slowdown in China, emanating from the financial sector, to tighter monetary policy from the US. Equity markets in this region have underperformed on the back of these concerns, and company valuation levels are becoming more attractive. However, equity prices are not yet at a level where we feel comfortable increasing exposure.
Ukraine tension adds geopolitical risk…
There are echoes of the Georgia-Russia crisis of 2008 in current events in Ukraine, with the difference being that Ukraine has greater political significance. On a rational level, it seems unlikely that Russia would want to take on the economic liability of Ukraine, as well as trade and political sanctions. Geopolitically it doesn’t appear to make sense. The show of strength could be intended, ultimately, simply to burnish Putin’s reputation within Russia as a strongman and defender of Russian values. Russia’s chief exports are oil related, so sanctions will likely drive up energy costs and could transmit a stagflationary shock to the global economy. Ukraine is a major wheat producer, so we would expect food prices to be similarly adversely affected. The impact on the supply of natural gas is unclear: it’s really in no one’s interests to turn the flow off.
Concerns over a spike in energy and food costs could impact sentiment globally, but particularly assets in the region; Central and Eastern European markets and currencies would likely suffer, as would countries dependent on energy imports. Within emerging markets, India could be quite exposed on this front. Commodity markets should, broadly speaking, see price increases. Ukraine’s role as a wheat exporter will likely push up agricultural prices, while uncertainty over oil and gas supply may push up energy prices. This could all be supportive in the short-term for some commodity exporters, particularly if they are energy-independent.
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