Market Update – Volatility abound but good news continues in the Developed Economies
Over the last week, there has been a significant increase in volatility in the global stock markets. We have seen some of the major global index returns made year to date, wiped out and go into negative territory. As an example we have seen the FTSE 100 decline 1.19%, the MSCI Emerging Market Index decline 4.88% and the MSCI World Index decline 2.27%.
Despite this, our portfolio performance ranges from -0.05% to 0.37% YTD and have outperformed the indices on both the upside and the downside. Accepting that at their peak on the 16th January, the four portfolios ranged from 0.5% – 2.2%, so we have seen them decline, but the percentage declines have been far less than the respective indices.
Risk is still being rewarded if invested in the right areas and equity is the only place to be invested looking forward over the coming three to six months. We are therefore not concerned and are focussed on the strong economic data that continues to come through. Although there are some pockets of concern in South America, Southern Europe and in the Emerging Economies, we are committed to investing through this period of volatility.
Our reason for this is that we are expecting portfolios to increase as quickly as they have fallen over the past week. We believe that the volatility in the markets will be short lived as it is not supported by the global economic recovery. For example, last week’s economic data for the UK was encouraging and figures showed that the unemployment rate in the UK is now at 7.1% which is just slightly over the previous threshold of 7% which was agreed by Carney in 2013.
It is worth mentioning that the Bank of England made it clear that they would only begin thinking about adjusting policy when the unemployment rate hits 7%, and that it was not a “trigger” for any change. Nevertheless, as proven by the U.S. last year, forward guidance is difficult to maintain; and last week was proof that the Bank of England are too having difficulty upholding it.
Carney’s guidance is not going quite as bad as Man United’s season, but it may well be on track! Last week was evident that unemployment is falling faster than expected by the Bank of England, mainly due to an underestimation of productivity in the UK. Since the financial crisis, the level of GDP has slowly moved towards its long term average with little movement in the unemployment rate until last year. The pre-crisis level of unemployment was around 5.5%, so there may well be more scope for the unemployment rate to fall further this year.
As a result of the data release last week, Carney has now admitted that his guidance must change and what we are likely to see going forward is an extension to the current metrics. Carney will now need to take into account a range of further factors affecting the labour market as a whole.
To summarise the above, we believe that whilst markets are currently volatile, this will be contained as the economic fundamentals in the developed world have not changed. In our opinion, emerging markets look cheap in terms of value but the outlook for them will continue to fall this year, especially as QE tapering gains further traction. We therefore, made the decision to remove our directional exposure to emerging markets from the portfolios last year, which has worked in our favour.
Therefore, we do not intend on making any immediate changes to the portfolios at this stage. Please contact the team should you have any queries; otherwise have a lovely day!
All the very best from the team here at OCM.
OCM Asset Management