Quarterly Market Update – April 2015

“…diversification is important to ensure investors are not reliant on one area to deliver returns.…”

If we could have a crystal ball to see the future it would help. The reality is that we don’t and all we can do is look at the past and consider what might happen in the future.

In last quarter’s update I said I was moving towards optimism for 2015, and to date this has played out. As we indicated the fall in oil prices, strength of the dollar and weakness of the Euro and Yen would likely benefit European and Japanese companies and this has been the case so far in 2015.

We have some positive signs from Europe; car sales are up 23%, retail sales are strong in Germany, Spain and Ireland and the index tracking consumer spending habits show those considering a major purchase is at its highest level since 2001.

In Japan energy imports are 3.6% of GDP, any fall in oil prices has an immediate positive impact and unlike many other major economies energy as a sector only makes up 1% of its stock market. Combine these factors with strong corporate earnings and a P / E ratio well below the historical average it places Japan in a strong place.

However, there is uncertainty ahead. The UK election needs to be considered with the broader global environment in mind. We can try and second guess the result but it is better that we don’t! It is conceivable that when we look back at the year we still have a strong economy and some form of functioning government. However, there will be short term volatility.

In this update we will focus on the wider global environment and highlight the positives and areas of potential concern. Clearly the UK is only part of a wider global environment and it is not the outcome of the election which will damage global confidence. It therefore pays to diversify assets and not be focused on one area or region.

There are concerns around the US, Greece and Europe, the Middle East and Russia and the Ukraine. Many of these have carried through from 2014 and any of these can unsettle the markets. As can events we are not aware of. It is these factors combined that could impact on returns.

The first quarter has been strong and although we don’t expect the next quarter to be as strong the end of year figures could end up better than 2014. Predictions are not always guaranteed!!!!


Inflation is now at zero which at least means in many cases cash is no longer delivering negative returns. However, the rates of returns remain low. The best ISA currently is 2.50% fixed for 4 years; a lot can happen in four years and many people wouldn’t like to lock money away for this length of time! For a 12 month fixed rate the best cash ISA is currently 1.65%.

There are good reasons for holding cash, many of these will be for short term goals; for example tax bills, house repairs etc. It is unlikely that cash is being used to provide income and therefore there remains a strong argument that keeping a minimum amount in cash is more prudent in this environment.

The great debate on when interest rates will rise continues, it seemed that it would be the end of the year. This has now moved to the first quarter of 2016 and some are even saying it could be 2017. The point is that we don’t know.

Another important factor is the pace of increases, the stated upper level is 3%. This could take five years to achieve, and other countries that have tried this have stopped at 2%. This means that cash savers hoping to see a rapid rise in interest savings rates will be disappointed.

Therefore the view remains that investors seeking income, or growth, from cash based investments may need to take on more risk to get the returns they are looking for.


The US has started to ‘lag’ with Europe and Japan taking up the baton.

When we talk about the global economy this is an area to watch. There remains a lot of confidence from the US but what we don’t want to see is a recovery in Europe and Japan at the expense of the US. There are signs that a strong dollar is having a negative impact.

Corporate earnings were strong but started to slow towards the end of 2014. Exporters started to see a fall in profits, although domestic focused companies continued to deliver positive growth between 5 and 10% (for the year).

Energy stocks are also struggling with the lower energy price, and this reflects a projected growth in the S&P in 2015 of around 3%. If you take out energy stocks this increases to 10% and we suspect if you focused on domestic companies that would increase further.

Although the job market is good (3.1 million jobs added in 2014) the nominal wage is still slow and this is something to watch. However, the fall in inflation has helped increase real consumer incomes at a rapid pace which is supportive of stronger consumer spending. However, the fall in inflation is driven by the lower oil prices so could be temporary.

Speaking to commodity fund managers it appears that a number of energy producers are holding off oil production until the cost of oil reaches $65 a barrel. The problem with this is that if they all switch on at the same time you have over supply and it drives back down the cost of oil!

There are a number of factors to consider in the US – both positive and negative. How the Fed and the US economy as a whole responds to this is crucial in 2015. We are already seeing rate rises being pushed back from June to September, and perhaps to the end of the year. This is reflective of getting the timing right without having a negative impact on the economy.

Europe and UK

We should start with Greece and the painful dance between the rest of the Eurozone, Russia and Germany. In 2011 the uncertainty in Europe caused a mini collapse in the markets because the greatest fear was “contagion” and whether its collapse could trigger a collapse of other economies like Italy, Spain, and Portugal.

Although Europe is not out of the woods it is far stronger than it was in 2011 and it could probably absorb the debts from a collapsing Greece. Also, today, the markets are less worried about the “contagion” effect because we are starting to see weaker countries like Spain turning their economies around.

Greece shouldn’t be ignored but it is not the worry it once was.

Belief is often more of a catalyst than any action and there is a genuine belief that Europe has turned a corner. There are factors which have played in their favour and this adds to the worry that the confidence and growth in Europe is at the expense of the US.

The Euro has fallen the strongest against the dollar and this combined with a fall in oil prices has been good news for exporters. Austerity is less stringent, credit markets are improving and some of the problem children like Spain and Ireland are becoming the poster boys for how it should be done.

Consumer confidence is strong with car sales up 23% and those considering major purchases at its highest level since 2001.

Combine this with the commencement of QE; Europe seems to be turning a corner. We highlighted in the last update that Europe could surprise on the upside and we are seeing this. The challenges shouldn’t be ignored – unemployment and debt remain a problem but it needs to climb the recovery curve and this year seems to indicate it might just be doing that.

Turning to the UK…………

On the positive side unemployment continues to fall, real wage growth has finally turned positive and zero inflation is positive news for consumer spending. But the UK continues to run one of the largest structural deficits in Europe and it needs to cut this if the economy is to perform well, and grow.

The election will bring volatility and it is different to anything we have seen before because the smaller parties will have a greater say in what happens. We could have political paralysis which means getting any new laws approved is a problem and also getting the finance bills approved would be a challenge.

It could slow down business investment which in turn would slow employment. In the short term it might slow down austerity measures which would help economic growth but in the medium to long term when global liquidity tightens this will hurt the UK.

It is the ‘ifs’ and ‘buts’ which are creating the volatility. The reality is that when we look back on the year we are likely to have some form of functioning government (whether Conservative, Labour or something else (!)) and due to the strength of the economy it shouldn’t derail the recovery.

However, the real concern for the UK is the global economy, if the US starts to slow and this spreads globally then this would be an issue for the UK economy.

In summary Europe seems to be turning a corner and although there remains challenges it has the opportunity to climb the recovery curve. In the UK the recovery is much stronger but the election will create volatility. However it is likely that some form of functioning government will be formed.

Asian, Frontier and Emerging Markets

Our view remains that careful stock picking is the key.

Some interesting countries to watch include Vietnam, still coming out of the effects of the war with America but it is a fast growing economy and has some very strong companies, Myanmar, has elections this year which could have a big impact on reducing embargoes and other constraints to doing business and finally Cuba which is dependent on the US finally lifting restrictions on travel, commerce and other financial activities.

Away from these countries India continues to push forward. Inflation over two years has fallen from just under 10% to 5%, there is an easing monetary policy and the reformist government is making headway in improving the country’s position in the world. China seems to have managed a soft landing and low inflation is helping in lowering food prices and therefore putting money in people’s pockets.

The challenge for China remains the currency, many countries where they go head to head with (on exports) have a depreciating currency which places them in a far stronger position. It remains to be seen as to how China will respond to this.

Clearly oil plays a big part across Emerging, Frontier and Asian Markets. The net oil consumers like South Korea, Thailand and Malaysia will benefit but countries that export like Russia, OPEC countries, Colombia and Mexico the news is not so good.

Brazil is perhaps an area to watch; tightening monetary policy combined with lower export prices, drought, corporate scandals and high inflation means they have much to overcome. Turkey is also challenged by its net dollar liabilities in its banking and non-financial corporate sectors.

In summary the outlook for emerging markets remains mixed. Good returns will come from careful selection of sectors, countries and companies.


2015 has been extremely positive for Japan. Like Europe, Japan has benefited from lower energy costs and a weakening currency. Energy is significant as imports account for 3.6% of GDP so any reduction helps growth as does the weaker Yen which makes products more competitive globally.

Similar to Europe, Japan is one of the shining lights for 2015 but the concern remains that any upsurge in Japan is not at the detriment of the US. There are number of positive factors for Japan, there is strong earnings momentum coming through, the P/E ratio is well below the historic average, there is a significant change in the way that corporate Japan treats shareholders and the Government Pension Fund has now increased its holdings to 25% domestic Japanese equities.

We indicated in the last review that investors shouldn’t discount Japan, and certainly the first quarter seems to have supported that statement. For now it remains an area to watch.


Although we remain cautiously optimistic for 2015 investors should be aware that many developed markets are not as cheap as they were and therefore there should be an acceptance of lower returns.

The UK election is important to the UK and will create some volatility however it is how the rest of the world is doing that is important. Both Japan and Europe have benefited from a weaker currency and lower oil prices, however the potential worry is whether the growth in these regions is at the expense of the US. This is something to watch.

In emerging markets some countries will suffer from lower oil prices but others will benefit so selective investment is needed. There remains uncertainty – Greece / Eurozone, Russia / Ukraine and the Middle East – but there will always be uncertainty. What we have to hope for is not to have another shock like the fall in oil prices, or something more significant.

What is clear is that diversification is important to ensure investors are not reliant on one area to deliver returns.

In conclusion we remain supportive of the statement that returns will return to a new norm which will be around the 5% to 8% mark and assuming no ‘unknown unknowns’ occur, 2015 could be a positive year for investors.

Source: Data sourced from Schroders, Templeton, Standard Life, and JP Morgan.

NOTE: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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