Market Update - November
Economic policy diverges...
The Bank of Japan (BoJ) surprised markets as it announced an additional ¥10trn in annual asset purchases, just two days after the quantitative easing (QE) program concluded in the US. The European Central Bank (ECB) is also targeting an expansion in its balance sheet, opening the door for quantitative easing. While financial markets cheer at the boost of liquidity, these measures may not ultimately lead to the self-sustaining economic growth sought by policymakers, as more significant structural reform is probably necessary.
Delays in interest rate rises
While we think UK growth is still strong, the pace is likely to be slower from here, dampened by weaker growth in the Eurozone and a moderation in house price increases. The resultant more subdued outlook for inflation has delayed the prospect of an increase in the UK interest rate, now more difficult given the loss in economic momentum and uncertainty from the upcoming General Election. We expect the first interest rate increase in the fourth quarter of 2015.
The going gets tougher...
Although equity markets have rebounded from the October weakness, we think that the volatility is a sign of things to come as global policy diverges and the global economic recovery loses momentum. The strength of corporate earnings, particularly in the US is supportive of equity prices, whereas liquidity and the search for yield is a boost for equity markets in Japan and the Eurozone. However, our policy is moving more cautious, seeking to avoid potholes and focusing on assets that can cope with anaemic economic growth.
In that respect we continue to favour the US and UK equity markets where corporate earnings trends are more established and robust. Property continues to generate attractive income flows and we are holding positions. Bonds seem expensive when compared to history, but may be supported by continued low interest rates and reducing inflation expectations, as well as the safe haven status of UK government bonds if European growth deteriorates. We continue to hold low volatility absolute return funds in portfolios as an important diversifier where appropriate.
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