Monthly Archives: August 2015

Financial Markets and the Special Forces

The last 7 days have seen the world’s stockmarkets suffering volatility levels last seen in the summer of 2011. It is well documented what is causing this volatility – China, however as I have recently stated there are other concerns in the world as well. So have we seen the end or the so called bottom of the market? Well probably not, but who knows. You see, because these questions are not really that important if you are a long term investor. They are only important to people trying to make a quick buck.

All doom and gloom, really?

The global economy is not in that bad a shape. Sure there are concerns about a slowdown in China. But we have to get this into perspective, by slowdown we mean the Chinese economy or GDP slowing to around 6%pa. There are some western economies that would welcome a ‘slowdown’ of that proportion. In the US they are talking about interest rate rises, simply because the economy is continuing to recover. And in Europe things are recovering nicely. The Japanese economy is also coming along well, and is providing plenty of growth opportunities. So it is far from doom and gloom.

Overreaction?

So why are markets like Special Forces? Well as you know the SAS shoot first and ask questions later. And in my opinion the financial markets react to bad news in very much the same way, in fact they tend to overreact, and literally the losses can appear like a bloodbath. And when the news becomes fully available and people have had chance to look calmly, the markets start to adjust, usually upwards. And I have absolutely no doubt that this will be the case this time also.

It is only a problem of course if you need your money right now, and if you don’t then sit back and don’t worry, because it will all be alright in the longer term.

Long term approach.

Couple of points I wanted to share with you. I am on holiday on the Algarve at the moment, and Declan and Sharon are ‘holding the fort’ superbly. But I asked Declan today, the 25th  has he had to speak to anybody concerned with the volatility in the markets, and his reply was no. Not a single person. Maybe I am preaching to the converted then, even as I write this. But on a serious point, and many of you are aware of me saying this in the past. But when the markets are making television news because the screens are all red, let me give you a piece of advice regarding your client websites? Don’t look. Stay off them for a while. Honestly, sometimes you are better off not knowing.

As always, stay the course!

Market Update

US Interest Rates

Financial markets are struggling to find any clear direction at the moment. Commentators seem certain that the Fed Reserve in the United States will increase interest rates. However certain arguments need to be resolved before some of the gloom can be lifted, and one such discussion is the likely direction of the US Dollar. The ‘greenback’ is now trading at an almost 10 year high against virtually most foreign currencies.

There are worries about the Federal Reserve raising interest rates. Some people believe that rates should start to rise because unemployment is already strong in the US. Labour is becoming harder to find, wages are rising, and inflation is sure to follow. So the credibility of central bankers is built on fighting inflation, and that makes higher rates a racing certainty. But, some people look to the deadening impact of the strong dollar on US manufacturing, on US corporate profits, and on economic growth generally, and wonder if the strength of the dollar has not already done what rising interest rates are supposed to do. And of course if the US economy was to receive a double impact now with a rate rise this could lead to the US economy falling back into recession. Moreover, who would raise interest rates now, with the world still in disinflationary mode, and commodity prices falling further, and global demand shrinking? So if rising rates in the US are a racing cert, then all I would say is look what happens to racing certs from time to time.

And on the same subject of interest rates, what about the UK. Well surely it is a similar situation here, so for the life of me I cannot quite understand why Mark Carney (Governor of Bank of England) is talking about interest rate rises in the UK. After all, the economy is not exactly running away with itself, maybe with the exception of the South East of England. And inflation has become deflation, with further commodity prices still falling. I would not be too quick to put any money on a rate rise in the UK either.

It does go to show however what a difficult job that these institutions have to make from time to time. Both the European Central and the Bank of Japan started Quantitative Easing (QE) in the last 12 months which has led to their respective currencies weakening, and at the same time stimulating growth in their respective economies.

 

Fixed Income Asset Class

The uncertainty of a future rise in US interest rates has led to a lot of volatility in the fixed income sector over the last 3 months. I covered the difficulties in the fixed income asset class in my blog of 15th June. The recent events in fixed income markets have called into question the asset class’s reputation as a dull if dependable vehicle for savers.

Volatility in bond markets has prompted investors to pull money out of fixed income funds, as the latest figures from the Investment Association reveals. In June this year, fixed income funds were the worst selling asset class for the second consecutive month with a net retail outflow of £198m. As the trade body points out, this is the largest outflow since January 2014.

As the head of the European Central Bank, Mario Draghi warned investors earlier this summer, it’s time to get used to turbulence.

The opinions above are my own, but shared after consulting with Chris Derbyshire the Chief Investment Officer for 7IM in London