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Market Bulletin - Reaching higher

13 April 2015

Equity markets continue their ascent despite investor apprehension over the outlook for the eurozone.

Despite the apprehension hanging over markets last week whilst the latest episode in the Greek debt crisis played out, equity indices worldwide continued to move onwards and upwards. And notably the US, Europe and Japan all reached, or approached, significant milestones over the course of trading.

Equity bulls on the other side of the Atlantic were buoyed by GE’s announcement that it planned to sell the bulk of its finance business and return up to $90 billion to shareholders through stock buybacks and dividend increases over the next three years. This news helped to shrug off worries over first-quarter earnings and the renewed appreciation of the dollar. The S&P 500 index closed the week up 1.58%, just a whisker away from last month’s record close; all this in a week shortened by the Easter holidays.

In the UK, the FTSE 100 Index broke new ground again, closing at 7,089.77, eclipsing the previous high set in March. News headlines were dominated by Shell’s blockbuster deal to buy BG Group for £47 billion, sparking speculation that further deal-making – not only in the energy sector – could be on the cards.

European markets also set new records. The FTSEurofirst 300 Index gained almost 4% over the week to record its highest finish since October 2000, on the back of prospects for continued policy accommodation from the ECB and further weakness in the euro. Digging deeper, two of the most influential members of the eurozone – Germany and France – saw their domestic bourses achieve strong returns. In Frankfurt, the Xetra Index finished at a record high.

In Japan, the Nikkei 225 gained almost 2.5% over the week and briefly broke through the 20,000 level during Friday trading – the first time since 2000 – before falling back slightly to settle at 19,907.

In the bond markets, the yield on 10-year US Treasuries gained 10 basis points over the week as the market moved to price-in the prospect of higher rates. Minutes of the Fed’s Open Market Committee last month – released on Wednesday – showed that policymakers were split on when interest rates should rise but reaffirmed expectations that rates would rise this year. Many commentators now view September as the most likely point.

The yield on German 10-year Bunds is now 0.16% (falling as low as 0.14% during the week, another new record), reflecting the impact of the ECB’s asset-purchase programme and the lingering worries over Greece’s ability to successfully manage its financial obligation to the International Monetary Fund (IMF).

Tragedy avoided (for now)

Thursday saw all eyes turn to Athens as the Greek government’s loan repayment to the IMF fell due. Markets breathed a collective sigh of relief as it emerged that the €459 million payment was made, giving the beleaguered nation a little breathing space before €950 million needs to be paid next month.

The latest IMF payment was required as the Greek Prime Minister, Alexis Tsipras, met President Putin in Moscow to discuss cooperation between the two nations. While both parties denied that Greece had requested financial aid, the two sides are said to have talked about extending a Turkish natural gas pipeline through Greece and relief for Greece from Russian counter-sanctions on European food imports.

Whilst some might welcome the Greek government’s attempts to seek help for its plight, there are clear political sensitivities to consider given the current sanctions imposed on Russia. Fund manager Stuart Mitchell of S. W. Mitchell Capital recently commented on how the underlying challenge facing the Greeks may evolve over the coming months.

“At the end of the day it comes down to political will. There is ample cash available but Greece has to agree to necessary reforms. We have been somewhat surprised by how aggressive the Greek negotiating position has been. Bringing up Nazi atrocities when your future depends on the generosity of Germany is curious. Despite the insults, however, Europe would still much rather have Greece in the euro than outside. As well as the obvious contagion questions, the defence of Europe could be threatened if Greece falls under the influence of the Russians or Chinese.”

Furthermore, as Mitchell noted, what’s ultimately needed is a long-term solution, rather than a continuation of the hand-to-mouth existence seen last week. “The Greek leadership is gradually becoming more realistic, confronted by the cold realities of their desperate financial situation. The crucial deadline will be in July when Greece will have to refinance a number of large bond maturities. We would expect a compromise to be hashed out by then. Longer term, however, Greek debt will have to be consolidated. The key will be finding a way to do this that is acceptable to the German electorate.”

A new beginning

Last week also heralded the start of the new tax year. And whilst there was considerable focus on the myriad of options now available at retirement resulting from the new pension freedoms, another significant change to the UK’s financial legislation means that Child Trust Funds (CTFs) can now be transferred to the more flexible Junior ISA wrapper.

CTFs were opened for all children, an estimated six million, born between 1 September 2002 and 2 January 2011. Today, almost £5 billion is held in these accounts, which were superseded in November 2011 by the launch of the Junior ISA. The new vehicle, however, was not available to those children eligible for a CTF.

On the face of it, the two products look similar: both enable up to £4,080 to be invested tax-efficiently each year and the beneficiary is able to access the funds when they reach age 18. However, the decision to permit transfers from a CTF to a Junior ISA gives parents more flexibility and a greater range of investment options to find a solution more likely to achieve the financial objectives they have in mind for their children.

Chris Ralph, chief investment officer of St. James’s Place, commented: “The changes to legislation should be warmly received. Investing for our children, or grandchildren, is an aspiration for many parents and grandparents today. The cost of university tuition fees or finding the deposit on a first house is a tremendous financial responsibility. Investing early into real assets, which offer the potential for the greatest returns, is the best strategy to give your loved ones the best possible start in life.”

S. W. Mitchell Capital is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. 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. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2015. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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