The last week in the financial markets has been the most turbulent we have seen in 2014 hitting the lowest point in the last 15 months. This has left many investors questioning whats next and how will it affect them.
Below you will find a summary report from Close Brother Asset Management on the weeks event and their view of what investors can expect next. It is a good summary of current markets, investors worries and possible outcomes moving forwards.
Markets have been extremely volatile, and are now in a clear corrective phase
- The US market, the only major market in positive territory year to date (as of 15/10/2014), is now down about 7.3% from its mid-September peak
- The UK market is now down 8.0% year to date
- Bond yields which have been declining all year, saw another sharp decline yesterday, with the US Treasury ending the day just over 2%
- The 10 year gilt is up over 10% in price terms. Or looked at another way, the US and UK 10 year have experienced roughly a 35% move lower in yields
- The VIX (measure of volatility) has risen to a recent high of 26 (highest level since 2012) and hit a high of 32 intraday yesterday
Investors are worried about:
- Slowing global growth with clear weakness and signs of deceleration in parts Emerging Markets (commodity producers), Europe and Japan
- Continued sharp declines in inflation, more recently triggered by lower commodity prices. The spectre of more widespread deflation is a concern. Brent oil has dropped 27% since peaking in June.
- Rising dollar and concerns about its effect on US overseas earnings
- Fed QE exit and the spectre of rate rises next year..
- ISIS and Ebola-we do not think these are investment issues, but nonetheless they add to the uncertainty
- This is another correction in the bull market that started in mid-2009, not the start of a bear market
- Growth is moderating and the economic volatility is all part of our view that we are in the midst of a weak and elongated recovery cycle, but we are not entering a recession
- Lower commodity prices act as stimulant to demand as the world’s largest economies are net commodity importers
- Dollar strength does not hurt the US too much (exports 15% of GDP) and helps Europe and Japan as relative export oriented economies (circa 35% of GDP)
- Central Banks remain accommodative and, if anything, global growth concerns might prompt further easing in Europe and more dovish comments about rates rise from Yellen in the US
- The earnings outlook remains challenging and stock selection is critical, however we can see attractive earnings selectively and value in shares we own and may add to
- The correction in bond markets has been exacerbated by technical issues and amplified by margin calls
What are we doing
- We remain judicious long-term buyers. We are value investors and are looking to selectively add to shares where we see value
- We are patient and are moving cautiously as we don’t want to be in front of a market that may correct further
- We are multi asset class investors so our portfolios in a correction benefit from diversification –we are not 100% in equities.
- We have some cash in portfolios which we will deploy as and when the dust settles or selectively in names where value has emerged
- From an equity asset allocation perspective, our relative positioning is in:
- Quality global franchises with high dividend yields (these are excellent long term sources of growth and income for clients)
- UK companies that benefit from domestic recovery and a stronger dollar
- The US market where we continue to like old technology and health care and select consumer franchise shares, and believe we will benefit from dollar strength
- More recently have added to Japan on a hedged basis (the lower yen translates directly into better earnings)
- Underweight and cautious on Europe for obvious reasons