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Mountain high

06 October 2014

The great equity rally of 2013 took stocks and shares to new peaks, but investors can still aim for new heights.

Investors entered 2014 with a strong and long climb for equities behind them and an acknowledgement that the pace of this upward march might not hold up in the months ahead. Chris Ralph, Chief Investment Officer at St. James’s Place, looks back on the year so far and gives his assessment of the state of global markets as they move into the final quarter of 2014.

Q. What’s your impression of the overall sentiment among investors as we enter the fourth quarter?

CR. At the beginning of the year, I reflected on the strong growth of equity markets over the past couple of years and shared my views on the prospects for markets in 2014. I spoke of the need to re-establish more realistic growth expectations from equities after a period of stellar returns – a sentiment shared by many of the fund managers I’ve spoken with. Overall, there were some positive returns for investors over the first nine months of the year, but, of course, markets are never entirely predictable and there have been a few bumps along the way.

Q. What’s primarily driving equities at this point in the year?

CR. The momentum from 2013 and 2012 continued into the early part of the year and the economic backdrop of accommodative monetary policies has helped to keep asset prices buoyant as the world’s developed economies maintain their long march to recovery. The returns from equity markets are not as dramatic as last year, but they are respectable. The US benchmark equity index, the S&P 500, delivered almost 30% in 2013, but over the first nine months of this year gained 7%, which is still respectable. However, index levels remain near recent peaks and, significantly, historic highs. The S&P 500 breached the 2,000 mark for the first time in August and the headline UK index has threatened its all-time high in recent weeks.

Q. There’s been a fair amount of global uncertainty to weigh on investors over the summer. How has this influenced confidence in markets?

CR. The impact of geopolitical events in the Middle East and Ukraine, as well as the ongoing debate as to when and how quickly interest rates will be increased in the US and UK, has had the effect of re-setting the expectation levels of investors. The improved economic conditions in the US and UK have helped increase confidence among investors, and encouraged a further migration towards riskier assets; however, this sentiment has been offset, in part, by these developments that have added to the level of uncertainty in global markets.

Q. Valuations have been very much the talking point for investors in recent months. What do you think that markets will be looking out for over the remaining months of the year?

CR. With equity markets continuing to ride high this summer, concern has built up among investors over the valuation of equities. Certainly, ultra-loose monetary policies have sustained momentum in developed markets, and this has raised uncertainty over whether underlying fundamentals can catch up with values. In these conditions, volatility in equity markets has remained constrained. But, as the US Federal Reserve’s tapering of its asset-purchase programme, known as quantitative easing (QE), comes to an end in the next few months, and markets await a slow rise in interest rates, investors are keenly watching out for signs of increased volatility.

Q. Clearly, the return to more normal monetary policy conditions on both sides of the Atlantic is the major focus for markets. Should investors be concerned about this shift of gear by central bankers?

CR. The exit from QE and near-zero interest rates by the Fed, with the Bank of England likely to be close on its heels, has quite naturally fed investor apprehension. With economic growth beginning to reach levels that policymakers have been waiting for, investors will need to steady their nerves as the world economy and markets adjust to these new conditions. The good news is that business and consumer confidence is high on both sides of the Atlantic. And, although there is concern over deflationary pressures in the eurozone and Japan, at a company level the outlook appears healthy, as do valuations in both regions.

Q. What advice would you offer to investors in these conditions?

CR. Diversification remains our watchword. The old adage that investors should not put all their eggs in one basket rings as true today as it has before. Investors who diversify across different companies, sectors and regions, as well as asset classes, are more likely to be able to withstand the inevitable shifts in economic and financial conditions and to enjoy returns above inflation over the long term.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. 

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