Following the the political fallout following the referendum and the recent action by the Bank of England, MWM are pleased to bring you our latest market commentary covering Q2 2016 (quarter ending 30/06/2016).
In this instalment we look at the impact of:
- Investor safe havens
- An update on Greece
- The stabilisation of oil
- Emerging markets updates.
If you would like to discuss this market update in more detail, please do not hesitate to contact your usual MWM Financial Planner.
MWM market commentary: setting the scene
Markets staged a volatile display over the second quarter as they tried to interpret announcements from central banks. Geo-political events including the Brexit vote also provided a volatile platform which unnerved many investors. This uncertainty exacerbated fears over the prospects for global growth, even with commodity prices stabilising and the European Central Bank reiterating its commitment to supporting growth.
Focus later shifted to the US Federal Reserve and the debate surrounding the possibility of raising interest rates, as their domestic economy improved. The central bank whilst demonstrating their desire to hike rates, have on a number of occasions explicitly commented about external challenges and their concerns about the health of the global economy and thus any further rises are expected to be very gradual.
One thing of particular note this quarter was the stronger performance by emerging market equities. There have been a number of catalysts for this improved performance including the weakening of the US dollar, stronger commodity prices, and further policy stimulus by some emerging market central banks, together with hopes for positive political change in countries such as Brazil.
Brexit: The day everything changed (or did it?)
Of course the most influential event over the quarter was the surprise outcome of the EU referendum. I feel safe in describing the outcome as a surprise given the evident shock amongst the “Pro-Leave” campaigners the morning after and of course the clear absence of planning. Certainly markets were primed for a ‘remain’ vote, rising in anticipation in the week running up to the vote. When this failed to materialise, the initial shock was felt throughout global markets. Global stocks tumbled, UK Property Companies were hammered and of course sterling plummeted (as predicted), as investors fled to the traditional safe havens of UK gilts, German bunds, US treasuries and gold.
Consequently, the political situation appears challenged to say the least. The prompt resignation of David Cameron following the referendum created a power vacuum within the Conservative Party and with it of course the usual uncertainty that comes with any leadership election. Although Mr Cameron was the immediate casualty of the referendum, he was far from the only casualty. Jeremy Corbyn faced a stuttering but (even now) on-going challenge to his leadership of the Labour party. Several potential leaders of the conservative party saw their hopes of the top job dashed by political infighting in the aftermath that followed the referendum.
The hunt for safety
A consequence of investors moving to safe haven assets has been the addition of $1tn to the pile of negative-yielding government bonds over the last month alone. The collapse in bond yields worldwide has followed an escalation of stimulus policies from the Bank of Japan and the European Central Bank this year. Designed to combat low inflation and tepid economic growth, the measures have helped to push the yield on more than $12tn of sovereign bonds into negative territory. At the same time simmering anxiety over the outlook for the global economy is driving investors into the safest and most liquid sovereign bond markets despite the vanishing returns they offer. The question is for how long investors can continue investing in assets delivering such low yields.
Greece ignites again
Greece struck a debt deal that allowed them to unlock €10.3 billion in bailout money from Europe, avoiding another crisis. The event injected some short term comfort within European markets which are already faced with the uncertainty surrounding Brexit.
Creditors had been wrangling over the terms of debt relief allowed to Greece, delaying any solution and creating uncertainty. The €10.3 billion (£7.8 billion) payment is the long-delayed second installment of the bailout deal agreed last August.
Oil prices advanced closer to the $50 per barrel mark for the first time since last November, on growing supply disruptions across a number of countries including Nigeria and Canada. While a more positive assessment of the market from Goldman Sachs, citing strong demand from India also helped firm the price. The price of oil has become a barometer gauge for the health of the global economy and with the price stabilising to a degree, it has provided some well needed relief to the current political uncertainties driving markets.
Chinese headlines dissipated somewhat over the quarter with the build up to the European referendum. However, authorities did announce it would pump Rmb4.7tn ($721.8bn) into transportation infrastructure over the next three years, supporting 303 projects across the country, including railways, roads, waterways, airports and metro systems. The move is likely to boost many industries as Beijing struggles to reduce gluts in many industries and reverse an export decline that threatens further job losses.
After a lengthy impeachment process, the Brazilian Senate finally suspended President Dilma Rousseff for allegedly using State funds to cover budget shortfalls. The vote in the Brazilian Senate will not eradicate the political uncertainty that has prevailed during the process as Brazil still faces significant structural challenges. With the path of Brazil’s future far from certain, it has offered some light relief to markets with the prospect of a more market friendly leadership ahead.
Looking ahead, investors will remain focused on the actions and rhetoric of the US Federal Reserve. With labour markets continuing to strengthen, the Dollar is no longer appreciating strongly, and energy prices apparently having bottomed out, inflation could move higher in the medium term. However, Fed chair Janet Yellen’s determination to proceed cautiously before lifting rates appears more believable given the recent UK result and the implications on growth that this brings.
Overall business confidence remains lacklustre as concerns about the global economy continue to be exacerbated by uncertainties at home, particularly with nerves unsettled by issues such as Brexit and the prospect of further government spending cuts announced in the Budget.
Ultimately markets will continue to be driven by politics and monetary policy as we have seen abundantly in the last few years. We will remain in this low growth world with a continuation of policies by central banks to drive markets ahead. Geo-political events remain a threat but also provide opportunities. As is so often the case with the closing statement of our Market Commentary, “portfolio diversification” will remain a very important tool in this rapidly changing environment.
Although policy measures taken by the central banks around the world have made global recession a less likely scenario in the near term, one should question whether monetary easing alone, without corporate earnings, is sufficient to sustain market momentum.
About Menzies Wealth Management
Menzies Wealth Management is a subsidiary company of the Menzies Group, providing independent financial advice to both private and corporate clients. We are independent of all financial institutions.
This document (market commentary) is intended for general information purposes only and does not constitute advice. It is based on our current understanding of legislation, which may be subject to change. Menzies Wealth Management can accept no responsibility for any loss resulting from acting or refraining to act as a result of any material in this publication. Past performance is not a guide to future performance and the value of investments may fall as well as rise. Personal taxation will depend on individual circumstances. The Financial Conduct Authority does not regulate taxation and trust advice, or some types of mortgage.
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