Market Update - February
The lower growth global economy is more vulnerable to a loss of momentum
The post-recession economic environment has been characterised by much duller growth rates in the more mature industrial economies. Lower rates of growth are more vulnerable to a loss of momentum and it is this that has concerned markets this year. After a number of years of consistently low market volatility, we have seen a shift to significantly higher levels. Where previously central bank activity has restored market faith, recent policy announcements across the globe have been met with market scepticism. Downgrades to global growth forecasts have only enhanced the yield compression in bond markets, suggesting expectations of increased monetary stimulus in Europe and Japan and delays to interest rate rises in the UK and US.
The emerging market threat?
If slower growth in the West is one key post-recession characteristic, another is over-supply amongst emerging manufacturers and commodity producers. The consequences can be seen most obviously in the oil market, which has been further destabilised by the emergence of the US as a meaningful producer. The deflationary impact of oil price falls on import prices and input costs provides a stimulus to real domestic spending in the Western economies and a potential boost to growth. However, the market is focusing on the risks, and investors are concerned about a tightening of credit conditions. Were Western banks to find themselves undermined by heavy and rising bad debts arising in emerging markets, this could limit their ability to lend to customers in their home markets. Although some UK banks do have significant exposure to emerging manufacturers in Asia, there is currently no suggestion that problems in those countries are changing lending behaviour here in the UK.
Our diversified approach has helped shield our charity portfolios against the worst of the market weakness this year, with alternative assets such as property and absolute return generally protecting capital. We continue to believe that the bond market is unattractive for long term investors, with yields at historic lows and a significant increase in bond market volatility (60% higher in 2015 compared to 2014). Our analysis suggest that the current equity market weakness is based on poor investor sentiment rather than the beginning of a prolonged bear market. As such, for long term investors we are retaining our positions in equities and our bias towards western developed markets. We recognise that there are considerable uncertainties to navigate over the coming months and expect ongoing volatility. Through this we will continue to challenge our views and positioning, constructing portfolios to meet our charity client investment objectives.
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. Registered Office at 1 London Wall Place, London EC2Y 5AU. 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.