Posted on: 14 June 2016
As the UEFA European Football Championships kick off in France and provide everyone with a welcome viewing alternative to televised UK Brexit debates, we look back on how 2016 has gone so far.
A bumpy start
To say that global markets have been up and down this year is to understate the fact. Of course, we all know how the year began - China in turmoil, oil price crashing and global commodities flatlining. The markets held their collective breath as the global economy seemingly juggernauted towards a deflationary shock.
The gloom persisted throughout January and the first half of February, as the markets remained fearful that the Federal Reserve would increase interest rates, even when confronted with the evidence that the strength of the dollar was negatively impacting the US manufacturing sector and damaging emerging market economies. Thankfully, the Fed changed tack and decided that the global macroeconomic backdrop was too unsteady to withstand another interest rate rise.
The global jitters were compounded by the Bank of Japan’s surprise move to negative interest rates to desperately avert a return to deflation – or worse – the stagflationary environment that has prevailed in Japan for over a decade. The Chinese situation did not do much to quell panic either – China’s growth continued to tail off and the People’s Bank of China’s inconsistent approach to devaluing the renminbi caused investors to believe economic prospects were heading south.
In Europe, the looming spectre of UK Brexit began to cause consternation in February as the starting pistol for the EU Referendum was fired. Since then, sterling has been weak, UK equity returns have lagged other international markets and domestic UK economic activity appears to have slowed.
But in the first part of the year, in contrast to this volatile landscape, the assets that tend to offer some protection in uncertain periods, such as gold, started rising in value.
Things can only get better?
By mid-February, things had started to take a turn for the better for the global economy. The turning point was the Fed’s announcement that the status of interest rates would take global economic conditions into consideration, including the state of affairs in China. Markets interpreted this as an indication that the Fed would keep interest rates where they were, at least until the macro backdrop improved. The upshot was that equity markets rose almost uninterrupted until mid-April. Oil followed a similar trajectory, bouncing from a breathtaking low of US$27 and has since reached the giddy heights of US$50 per barrel.
As March turned to April, markets became hopeful that the European Central Bank (ECB) would expand its Quantitative Easing (QE) programme, which it duly did, in addition to giving incentives to banks to increase lending and further interest rate cuts. By doing this, the ECB hoped to reignite economic growth in the single currency region and give politicians an opportunity to introduce structural reforms in their respective economies.
April saw good news from the Far East, with an upturn in Chinese export and reserve data, which brought a smile to markets. And April also saw excitement begin to build that the Fed was once again ready to hike interest rates, until weak Q1 GDP figures rained on that parade. And the rain properly set in with US non-farm payrolls coming in significantly below expectations and just 75,000 jobs being created against the expected 130,000, after adjustments were made for a strike by workers at US telecoms giant Verizon. This has all compounded fears that the US job market could be running out of steam and the Fed will struggle to build a case to raise interest rates.
A cautious approach
At Duncan Lawrie, we started the year treading as carefully as we did at the end of 2015. Caution was the order of the day as equity market valuations were over-inflated, bonds were having an unhappy time of things with historically low yields and little being done to address the large levels of debt swishing around the financial system. And the way the year has panned out has vindicated our cautious strategy. Looking ahead, we expect a similar tone, but as always, we will continue to seek out opportunities on behalf of our clients.
All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.
The comments and figures in this document are generally applicable but you should always take specific advice to suit your individual circumstances before taking any action. Errors and omissions excepted.
The value of investments and income generated may fall as well as rise, and investors may not get back the amount invested. Past performance is not a reliable indicator of future results.