Investment Update: 2016 so far
Back in January RBS’s European Economist Andrew Roberts’ view that 2016 would be a cataclysmic year received much airtime. Roberts – a notorious bear – has made similar doom and gloom predictions in previous years – all were in main ignored and none of which held true. The fact that his 2016 view was so widely reported tells you that investors were beginning to panic and fear was rife.
This fear was driven by three main issues and impacted heavily on risk assets such as equities and commodities:
- Falling oil prices
- Rising US interest rates
- Chinese economy slowdown
However since Roberts’ warning on January 11th, markets have rebounded sharply – the FTSE 100 index for example is up 6.6% since Roberts’ announcement:
That said, there is clearly still some way to go before markets reach their April 2015 highs:
Looking at the issues that were driving panic back in early January:
- The recent trend of rising oil prices means that crude prices are now almost 70% higher than they were in late January when the price hit $27.10 a barrel – a 12-year low. This position has been strengthened by the US Federal Reserve’s announcement that it would leave US interest rates unchanged which immediately weakened the US dollar As oil is priced in the US dollar, a fall in the currency equates to a rise in oil prices, all other things held equal.
- The US Federal Reserve left the main rate of interest unchanged again this month after the initial hike from 0.25% to 0.50% in December 2015 – the first rate rise in nearly a decade.
Interest rate rises are typically bad news for equities. When interest rates are rising businesses will tend to cut back on spending as the cost of borrowing has increased. Existing borrowing will become more expensive and lack of investment will cause profits to fall and stock prices to drop.
As alluded to already, an interest rate rise would also in all likelihood strengthen the dollar which would lead to a reduction in oil prices.
Nevertheless US interest rates are likely to rise at some point this year; however the exact date is far from certain – the markets’ best guess is that the next rise will be in November.
- Chinese exports expanded in March for the first time in nine months. Exports rose 11.5% year-on-year in March after declines in both January and February and global equity markets rallied as a result of the announcement – the FTSE 100 index closed up 1.9% on April 13th:
Over the last 12-months China’s growth has slowed significantly, however, the most recent growth data suggests that the economy has stabilised. Still, some further macroeconomic stimulus might be necessary to hit the government’s growth target of 6.5%.
There is however some concern that the March rebound could be a blip fuelled by the significant borrowing and increased government spending in the first quarter of 2016.
A more recent development is the EU referendum. If the UK voted to leave the EU this would weaken Sterling as investors will look to move money from the UK. However this would provide an opportunity for investors with globally diversified portfolios as non-UK assets would likely benefit from increased returns due to currency appreciation against Sterling.
So whilst the performance of risk assets has been encouraging year to date, there are still potential problems on the horizon. Bears will point to these issues and reason that stocks should not be rising. Sadly, there will always be issues and the reality is that, as history has shown, stock markets rise most of the time.
Investors looking for long-term growth should maintain an element of equity exposure and where possible ignore the noise – those that heeded Roberts' warnings have missed out on significant growth. Sentiment can cause significant short-term movement in equities which can be distressing if unexpected and/or tolerances are exceeded.
At Helm Godfrey, we work with our clients to build investment portfolios that are tailored to meet individual needs and constructed in a manner that considers the returns required and the risks they are able to tolerate. By following our rigorous seven-step approach, our clients are equipped with a bespoke investment portfolio and the confidence to remain invested in a portfolio that is maintained, reviewed and rebalanced periodically even when experts such as Roberts are predicting doom and gloom.
 http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html & http://www.publicfinanceinternational.org/news/2012/07/economic-crisis-%E2%80%98worse-great-depression%E2%80%99
 http://www.federalreserve.gov/newsevents/press/monetary/20160427a.htm & http://www.federalreserve.gov/newsevents/press/monetary/20160427a1.htm
 http://www.bloomberg.com/news/articles/2016-04-25/china-s-regional-economic-divide-shows-li-s-hope-and-challenge & http://www.bloomberg.com/graphics/2016-changing-chinese-economy/