Market Bulletin - A confident march
The year has started with a series of market-moving events, but stock markets are at record or recent highs.
Investors could be forgiven for thinking that there have been enough market-moving events so far in 2015 for a whole year. Greece has moved to the brink of an exit from the eurozone but, after the weekend, seems for now to have stepped back. Russia is pulling the West towards a new Cold War. Islamic State’s ambitions remain unchecked. The direction of oil prices continues to look uncertain. The European Central Bank has belatedly embraced quantitative easing (QE). And government bond yields push lower. Yet global equity markets are brimming with optimism and marching at record or recent highs. Investors in this late winter swirl are seeking out opportunities as they remain hopeful that the world economy, led by the US and global business, will continue its uneven recovery.
Wall Street last week continued to benefit from investors looking for quality, with the S&P 500 index advancing to a record high on Friday of 2,111 points – which amounted to a weekly gain of 0.6%. All of the S&P 500 sectors ended in positive territory, except energy, which slid amid the uncertainty over oil prices. The world’s most valuable corporation, Apple, with a market capitalisation now of $749 billion, reached another record closing high on Friday to give the US index its biggest boost. The world’s second-largest corporation, Exxon Mobil, worth a mere $376 billion, has lost the support of Warren Buffett, who has sold his holdings in the energy giant, as well as ConocoPhillips, in response to the oil market woes (the octogenarian investor’s increased positions include IBM, MasterCard and Visa).
In Japan, monetary stimulus continues to boost the Tokyo stock market. The Nikkei 225 Stock Average closed on Friday at 18, 361 points – its highest level for 15 years – and continued to advance in early trading this week. Japan’s financials made the biggest gains, led by Mitsubishi UFJ Financial Group. There was positive news too for Japan’s economy, which expanded by an annualised 2.2% in the final quarter of 2014, after contracting over the previous six months. Japan’s exporters are benefiting from loose monetary policy via a falling yen that has bolstered competitiveness and revenues; while the weaker currency, rather than an improving economy, is powering the Nikkei. However, the Bank of Japan, which left policy unchanged last week, is concerned that an even weaker yen would push import costs higher, hit consumers further, hold back inflation and negate the benefits of cheap oil.
European equities also made strong gains last week and at the start of this week, reflecting investor faith in the ability of the eurozone to reach a deal on Greece and, perhaps more fundamentally, the confidence that they have drawn from the ECB’s decision to start to buy government bonds from March to support financial markets and boost economic growth in the eurozone. The FTSEurofirst 300 index advanced 1.5% last week to 1,525 points, and is up by a solid 11% so far this year (compared with a 2% rise in the S&P 500). Germany’s DAX also closed the week at a record high; the Greek stock market regained lost ground on Friday – and was closed on Monday for the beginning of Lent holiday – and has recovered by around 20% from its low after the Syriza victory last month.
Investors hunting for value have been increasingly drawn to the eurozone, irrespective of the Greek crisis. A Bank of America Merrill Lynch survey of fund managers suggests that exposure to the eurozone is the highest since 2007, amid the best profit outlook since 2009. Four-fifths of regional specialists surveyed anticipate a recovery this year. The open-ended nature of Frankfurt’s QE programme – which will run until inflation returns to acceptable levels – is a big factor. But, as Schroders economist Azad Zangana observes, signs of growth – particularly in Germany and Spain – have boosted expectations. AXA Framlington notes that consumer-oriented sectors, including telecoms, are most likely to benefit from a turnaround. Automotive, travel and leisure sector stocks are presently flavour of the month.
The bullishness on Europe is very much centred on the eurozone, while two-fifths of those surveyed by BoA intend to reduce their exposure to UK stocks and shares (and Switzerland’s too). However, the London stock market has not missed out in the recent rally in world equities, and the FTSE 100 index hit a 15-year high last Wednesday of 6,921 points and ended the week a fraction off the peak. The advance to levels last achieved in 1999 came despite renewed pressure on energy-related stocks as oil prices started to slide again. British Gas owner Centrica was one of the FTSE’s big fallers after it revealed that it would cut its dividend by a third, following a £1 billion pre-tax annual loss amid low energy prices, warmer weather and uncertainty over the direction of government policy after the general election.
Although Centrica is not alone among the big energy-related firms that have had to review dividend pay-outs in response to the fall in oil prices since last summer, overall, investors in the UK and worldwide are still being rewarded handsomely. The total dividend income paid around the world rose by 11% last year to $1.167 trillion, according to Henderson Global Investors. However, the divergence of the US and UK recoveries from those of the rest of the world, as well as the oil-price slump, means that dividend growth looks likely to rise globally by just 1% this year. The strong US dollar will also drag on dividend income from around the world once converted into the US currency.
Despite a more subdued prognosis for 2015, global dividend income has risen 60% since 2009. Last year, UK dividend payments were up by almost a third to $135 billion, while North American and Continental European payments rose by 15% and 12% respectively. In the UK, the rate of growth for income investors over the last six years far outstrips inflation and the negligible returns that deposit savers have endured since March 2009. In Europe, with government bonds offering ultra-low yields – J.P. Morgan reports that some $3.6 trillion have negative yields – it is natural that investors are seeking out income and taking on a little more risk.
In Britain, the backdrop for investors is that inflation is at its lowest level in decades, with oil prices predicted to fall further and energy providers likely to start cutting prices. The Bank of England expects inflation to be around zero in the second and third quarter, with a brief period of deflation this spring. There is concern about ‘bad’ deflation when caution sets into households and businesses – as the real burden of debt rises – and leads to the woes that beset Japan in recent decades. However, Britain’s economy is growing at its fastest rate for a decade. The ingredients are in place for ‘good’ deflation, when falling prices increase income, expenditure, enterprise and growth.
Crucially, the Bank of England views the fall in inflation as temporary and has lifted its medium-term forecasts for both economic growth and inflation. Prices are expected to rise at a yearly rate of 2.1% by the end of 2017. In these conditions, there is speculation that the Bank could raise rates later this year. However, the Bank has stated that, if there was a risk of prolonged deflation, it is ready to ease monetary policy with more QE or further interest rate cuts. The months in the run-up to the election and beyond will hold the answer as to whether or not the UK can pull clear of deflationary threats. But, as the Bank has reiterated, rate increases when they do finally come will be slow and low.
Investors and savers are now also entering the perennial run-up to the tax year-end in which to review personal finances and make full use of allowances, exemptions and other opportunities before they are lost. However, this year, spring also brings the introduction of the most radical overhaul of pension arrangements in Britain since the 1920s. Up to 320,000 people each year from April will have the freedom to cash in defined contribution pension pots from the age of 55, with no requirement to turn their savings into a secure income.
The Centre for Policy Studies has welcomed the liberalisation, but wants savers to be encouraged back towards annuities. Many people risk failing to buy suitable products and running out of money, it warns. The position is sensible: de-emphasising the need for a regular income and annuity has risks and liberalisation needs to be safe. As the debate intensifies, what is certain is that the changes are momentous and will require those approaching retirement to make momentous decisions. The importance of sound, expert financial guidance has rarely seemed as pressing.
AXA Framlington and Schroders are fund managers for St. James’s Place.
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