2014 held more surprises than a Hitchcock movie with possibly the biggest twist being retained for the autumn. Expectations had centred on markets being valued on fundamentals as the US Federal Reserve’s monetary stimulus came to an end. It was anticipated that there would be a gradual increase in economic growth prompting a rotation out of fixed interest bonds into equities. The big unknown was the extent to which the colossal increase in money supply would cause inflation to rise.
Over the course of 2014 investors took a stream of geopolitical unrest and contrasting economic data in their stride, supported by central bank buying. The only noteworthy market correction came in October as the Federal Reserve signalled an end to Quantitative Easing.
The Bank of Japan then picked up the baton and boosted its own stimulus package to include purchases of domestic and overseas equities. As deflation threatened the Eurozone, President Draghi of the European Central Bank finally presented plans for a monetary easing package. Investors realised that the game hadn’t changed, just the players and they returned to buying mode. The only inflation problem was a lack of it – helping bonds to outperform all developed stockmarkets with the exception of the US.
We entered the new year needing a period of consolidation to allow company earnings to catch up with market valuations. At the time of writing, shares in the UK looked to be on a firmer footing with positive growth and less stretched valuations. We feel there is likely to be a period of uncertainty ahead of May’s general election with the possibility of a hung parliament which will dictate whether or not the UK remains in the EU. This uncertainty risks dampening consumer and business confidence and possibly deterring investment in the UK.
The US stockmarket is arguably already fully valued but the economic positioning compares well to the rest of the world. Europe is in more of a mess than a toddlers placemat but will be supported by central bank money, as will Japan. Fixed interest bonds look expensive but could get more so if the threat of deflation persists, and property will remain a low volatility option with a reasonable yield.
To some, this may seem to paint a rather bleak picture yet circumstances such as these are where the experience and expertise of Discretionary Investment Managers such as ourselves can turn things on their head and really add value. So long as interest rates remain at historically low levels, in many cases offering negative returns after adjusting for inflation, then other asset classes will offer attractive alternatives.
Yes, we do see another year of volatile markets but we will look to exploit these buying opportunities within what we believe will be an overall future trend of rising markets.