- 15th Jan 2016
December Investment Commentary
Post the Great Financial Crisis (GFC) of 2008, the Federal Reserve in the United States was the first central bank to raise interest rates (see below). With the Bank of England forecast to be the second central bank to take action, the developed world is divided into two camps: those like the US and the UK where the period of historic low rates is coming to an end, and Japan and Europe which continue to “print” money in order to generate economic growth.
Throughout 2015 there were familiar economic trends; employment continued to remain at all-time highs while unemployment fell. Services continued to lead the recovery with manufacturing remaining subdued. Encouragingly there appeared to be some real wage growth, with inflation remaining low, helped by lower oil prices. Although the Bank of England is expected to follow the lead of the Federal Reserve in late 2016 or early 2017, the year ahead may be dominated by the upcoming BREXIT vote (whether or not we remain in the EU), a historic once in a generation referendum that may determine our relationship with Europe for many years to come.
The December rise in rates from 0.25% to 0.50% was the first upward move since 2006. The Federal Reserve feels confident enough that the economy is recovering sufficiently that higher (albeit modest) rates would not derail the recovery. In particular job growth remained over 200k per month and the unemployment rate at 5%. The strength of the dollar over the past year (which makes exports more expensive and raises import prices) remains a potential problem in terms of impacting profits. Looking ahead there is an expectation that rates will rise gradually throughout 2016 albeit from still historically low levels.
Despite its continuing toils (Greece and other Med countries), Europe did manage a positive performance for 2015 with a market rise of 2.78% in sterling terms. The ECB (European Central Bank) has pursued its own version of “quantitative easing” in order to encourage growth. Although there remains some encouragement from an increase in bank lending, euro inflation in November remained at just 0.1%, with some countries actually experiencing deflation. The ECB has a target inflation rate of 2%, which is not being helped by the low oil price.
Japan was the best performing major stock market in 2015 with a rise of 18.16% in sterling terms. It continues with its ambitious program of Abenomics (the economic policies of the Prime Minister Shinzo Abe); quantitative easing, government spending and structural reforms. So far the policy has not yet led to a significant pick-up in growth. However, when compared to other markets on valuation grounds, the Japanese stock market remains attractive.
2015 was another disappointing year for emerging markets with a fall of 10% in sterling terms. China and its troubles continue to cast a shadow over many other emerging markets. Chinese growth is widely believed to be 4% rather than the official 7% as overcapacity in both manufacturing and property, plus high debt levels continue to weigh on the economy. This has a knock on effect on commodity exporting countries such as Brazil and Russia. Rising US rates could also hit emerging market companies that have borrowed heavily in US dollars as their costs will rise.
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Any news and/or views expressed within this document are intended as general information only and should not be viewed as a form of personal recommendation. All investment carries risk and it is important you understand this. If you are in any doubt about whether an investment is suitable for you, please contact a financial adviser.
Investment in the stock market is not a suitable place for short term money and you may not get back what you put in. Investment in the stock market and any income derived from it, may go down as well as up. Past performance is not an indication of future returns.