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2 September 2016

Finance and investment wrap - September 2016

By Clive Hale, Director

For some time now I, and many other commentators, have been questioning the wisdom of zero or negative interest rates and quantitative easing. Markets are arguably broken and trying to divine an investment strategy is more akin to going through the card at Newmarket.

Faced with low or minus rates, savers are not spending; they are saving more! Plus those in search of income are being forced into areas which, from a risk perspective, they wouldn’t normally touch: high yield bonds, emerging market debt, equities and property.

Keeping on top of the markets remains as important as ever. We take a look at the key events you need to know about, region by region, in September.

Markets in brief:

UK

Our PM has told her civil servants that Brexit must be delivered, but we’re yet to see any sign of action. Triggering Article 50 would do it, but Theresa May’s reluctance in this matter suggests there is another strategy in play.

In the UK, Carney has said that he won’t go as far negative rates, but with the 30-year gilt yielding circa 1% he’s pretty much there already.

Meanwhile, Bank of England governor Mark Carney has cut rates despite any indications that the economy needed a flu jab. He has said he won’t contemplate negative rates and bond markets around the world seem to have taken that message on board, with government bond prices here and around the world, notably Japan, ticking upwards again.

US

In the US, consumer sentiment is up, most likely on the back of rising house prices. This, despite the fact that year-on-year house sales are falling again. In the US you can find a statistic to prove, or disprove, almost anything!

The serious electioneering is about to start, but don’t expect the debate to be ‘serious’. Rather like the Brexit episode over here, expect Project Fear to be used by both sides, but mostly by the main stream media at the behest of the various vested interests.

If the US Federal Reserve raise rates at their next meeting it will be the first time in their history they will have done so this close to an election. Barney Frank, a staunch supporter of Clinton and one of the co-sponsors of the Dodd/Frank Wall Street Reform and Consumer Protection Act has already told Yellen that it would be a mistake to risk destabilising markets and perhaps the broader economy a few weeks before election day. He is obviously only too aware that falling stock markets are a reliable indicator of change of party allegiance at the White House.

Europe

The EU has not yet fully woken up to the fact that Brexit is more of a problem for them than for the UK, and they are in no mood to see Article 50 invoked either.

We are a significant trading partner and the already fragile European economies would suffer further if we were to source more of our imports elsewhere.

Despite all the European Central Bank’s attempts, inflation remains stubbornly low and, as of now, heading lower.

Japan

With the odds on a September rate rise in the US improving, the US dollar has strengthened and as a corollary the yen has weakened, which is just what the policy wonks in Japan have been striving towards. The Nikkei is back testing the 17,000 level again.

Prime minister Shinzo Abe is still struggling to get the third arrow out of his quiver and the cynics are saying that he has in fact shot the first arrow (massive quantitative easing) three times! Unless the yen continues to weaken from here the outlook for the equity market has weakened considerably although on a relative valuation basis parts of the market are seriously cheap.

Asia Pacific and emerging markets

China’s slowdown is still a concern as is the ongoing devaluation that is exporting deflation to the rest of the world. The Chinese market is still being propped up by the government, but other Asian and emerging markets have generally done a lot better; India has been especially strong.

Another market that has been surprisingly resilient has been Brazil, which in local currency terms is up 50% since January. Dilma Rouseff has now been impeached for election rigging, and while the new president, Michael Temer has his work cut out for him, the Brazilian economy is showing signs of improving.

Commodities and gold

The oil price continues to struggle to get back above $50 on any consistent basis and, despite pumping for all they’re worth, the Saudis are finding their economy under considerable pressure. Non-oil GDP is now falling on a year-on-year basis.

Their cost of production is sub-$20. In the North Sea oil doesn’t make a penny under $52 a barrel; a message there for the Scottish National Party perhaps…

The precious metals have had a stupendous run since January, despite being the most hated asset class back then. We are now seeing a consolidation phase and prices may retrench below $1,300 for gold and $18 for silver. They are still one of the best insurance policies against central bank-induced currency debasement.

Bonds

The yield on the 10-year JGB (Japanese government bond) is still negative, but we have a seen an upward surge over the last month following the BoJ’s tacit admission that maybe, just maybe, quantitative easing doesn’t work. The implication being that the JGB buying program will cease. They own more than 50% of the market anyway so it would have had to have stopped at some stage!

Other markets around the world have followed suit, but in a much more tentative fashion.

The key bell weather to watch is the 30-year US treasury bond. A move back above 3.2% would herald a change in a very long running trend.

Where to next?

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Clive's views are his own and do not constitute financial advice.

©2016 FundCalibre Ltd. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of FundCalibre, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by FundCalibre, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. FundCalibre, shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use.