Market Bulletin (01/09/2015)
After the shock of ‘Black Monday’, the sea of red across dealing screens had largely turned blue as calmer conditions returned to global markets at the end of a dramatic week of wild swings for equity and commodity prices. The FTSE 100, S&P 500 and FTSEurofirst 300 all briefly went into correction territory – a fall of more than 10% from previous highs – only to bounce back and recover their weekly losses by Friday.
China’s benchmark Shanghai Composite index gained 4.8% on Friday, but still ended the week almost 8% lower. Share prices slipped again in Monday trading, dashing hopes that Chinese markets had turned a corner, with sentiment hampered by news that the authorities had decided to intervene less in the stock market. Since peaking in mid-June, the total market value of Chinese shares has fallen by around $4.5 trillion – more than the entire German economy. This morning has seen further sharp falls in equity markets in response to fresh data showing that China’s factory activity contracted at its fastest pace in three years in August. Tellingly though, market watchers reported that the panic button had not been pushed by ‘have and hold’ investors.
The UK benchmark index rose just shy of 1% over the week, but still registered its biggest monthly decline since May 2012. The S&P 500 index gained 0.9%. The VIX equity ‘fear index’ touched its highest point for six years – before retreating more than 50% following the move by the People’s Bank of China to cut interest rates in response to the local market turmoil. On Thursday, Brent crude oil had its best day since 2008, and further gains on Friday took it back above $50 a barrel to register its biggest weekly gain since 2011.
Underpinning the improvement in the markets was better-than-expected economic data from the US – second-quarter GDP growth was revised upwards to an annual pace of 3.7% from an estimate of 2.3%. The news added to market uncertainty over the outlook for US monetary policy. Earlier in the week, Federal Reserve member William Dudley told a conference that “international developments” had made the case for raising interest rates as early as September “less compelling to me than it was a few weeks ago”. Speculation grew that a delay was now inevitable. On Friday, however, Fed vice chairman Stanley Fischer stated that he remained unsure whether to vote in favour of a rate rise this month.
Despite the upheaval in global markets, fund manager Payden & Rygel remains confident in the health of the US and UK economies. “US exports are only 13% of total GDP. Exports to China account for less than 1% of GDP. A Chinese economy growing at say 4%, rather than 7%, isn’t going to capsize the US economy.”
Neil Woodford, of Woodford Investment Management, also stressed that investors should not have been surprised by recent events, but remains cautious of the global growth outlook and believes that US and UK interest rate increases are further off than the consensus view. “The distraction of seeing share prices fall indiscriminately can be overwhelming and distort rational perspectives. At times like this, having a few grey hairs helps, as does reminding yourself of Kipling’s timeless adage to keep your head when all around you are losing theirs.”
As we have commented previously, investors should not be surprised by news that the Chinese economy is slowing from what was almost double-digit growth in recent years, or by the return of volatility after a lengthy bull market in the US and other developed equity markets. Markets are likely to remain jittery, at least until the Federal Reserve meets in September to set US interest rates. Investors concerned with years rather than minutes should continue to ignore these short-term swings. Last week proved once again that the market’s best days tend to come shortly after their worst, and that those who sell will miss the rebound.
The market volatility has also reinforced the importance of diversification to help cushion investors against the impact of such downturns. ‘Safe haven’ bonds have not experienced the same drama as equities, commodities or currencies. Yields on 10-year UK gilts fell below 1.7% early in the week as prices rose, before climbing back to 1.9% as the situation calmed.
At the annual symposium of central bankers in Jackson Hole, Bank of England governor Mark Carney insisted that the recent market turmoil would not alter the course of the Monetary Policy Committee’s strategy, and that the decision to raise interest rates in the UK should come into “sharper relief” at the end of the year. However, fears of a new global downturn, coupled with the impact of lower oil prices on inflation expectations, have shifted market forecasts for future interest rates. The market view is that the first rate rise will now be in October next year, whereas a month ago March 2016 was seen as the most likely date. Furthermore, economists expect rates to have risen to only 1.5% by the end of 2017.
The week also saw confirmation that UK economic growth for the second quarter remained steady at 0.7%, supporting the Bank of England’s forecast of 2.8% growth for the year. Net trade made the biggest contribution in four years as exports jumped. China is not among the UK’s top five export markets and accounts for only around 8% of British imports. “With growth in households’ real incomes set to remain supported by low inflation, building wage growth and strong job creation, we continue to think that economic recovery will sustain its current pace in the second half of 2015,” commented Capital Economics. This theme is supported by Payden & Rygel, which points out that the UK unemployment rate has declined by 2% over the last two years, a pace of improvement in labour conditions that has only been seen on two other occasions since the 1970s.
After dropping 5.4% on Monday, its biggest daily fall since November 2008, the FTSEurofirst 300 Index recovered ground at the end of the week. A strong rebound in energy and mining stocks helped the index register a weekly gain of 0.6%, although it remained on track to record its worst month for four years.
Meanwhile, eurozone leaders closed in on preparing a Greek debt restructuring plan, which in the words of Christine Lagarde, managing director of the International Monetary Fund, should allow the country to handle its “unviable” debt situation. The options include extending loan maturities, suspending interest payments and transferring central bank profits back to Athens. However, Klaus Regling, the German head of the European Stability Mechanism, ruled out any write-down of Greece’s debt – a key commitment for Europe’s paymaster, Berlin – whilst warning that a Greek exit from the euro was still a possibility if Athens did not fulfil the terms of its third bailout agreement.
Figures released by HMRC last week confirmed that the total amount saved in ISAs rose to £79 billion in the last tax year. Deposits into Cash ISAs jumped 60% in response to last summer’s changes, which saw the annual allowance increased to £15,240 and restrictions removed to allow the full allowance to be saved in a Cash ISA. However, with the average Cash ISA rate currently just 0.87%, and little prospect of rates rising significantly for some years to come, concerns remain that cautious savers are not making the most of the valuable tax-saving and growth opportunities offered by their ISA allowance. Similarly, the figures also confirmed that the vast majority of 510,000 Junior ISAs are held in cash, where the real value of the savings risks being eroded by inflation – and despite children having time on their side to ride out the peaks and troughs of stock markets.
Payden & Rygel and Woodford Investment Management are fund managers for St. James’s Place.
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