Economic Summary for the week ended 11th Oct 2015

Last week saw a big bounce across almost all asset classes, with oil up close to 10%. As such oil related market outperformed (see huge moves in Norwegian and Indonesian equites or the rally in the Russian Ruble). In the current environment with enormous financial liquidity (from QE and low rates) but limited trading liquidity (given greater bank regulation), we think the distribution of market returns has changed. Positioning is crowded, volatility is generally lower, but tail risks are more significant. This perhaps helps to explain recent moves.

At a fundamental level, the global economy is characterised by consumer strength (from easy policy and lower commodities) and industrial weakness.On Tuesday, the IMF again lowered its global growth forecast for 2015 and 2016; there is a sense of déjà vu.

Economic Summary for the week ended 5th Oct 2015

The Euro Stoxx 50 is now lower than it was going into the final quarter last year. Back then Brent oil was trading at around $100, EURUSD was at 1.26 and investors were relatively optimistic with only 15% of them describing themselves as bearish.

Since then the European Central Bank (ECB) has started printing €60bn a month and said it is willing to add more if necessary, the Euro has weakened by around 10% and the oil price has more than halved. Yet 30% of investors now describe themselves as bearish, the highest proportion since 2012 and valuations are back down to their long term average. We think the low oil price, low euro, low borrowing costs, reasonable valuations and already weak sentiment will support European equities from here.

Economic Summary for the week ended 21st Sep 2015

Whilst all focus was on the Fed last week, some important European data points will be released this week. Eurozone consumer confidence is released on Tuesday and PMIs on Wednesday.

Consumer confidence is close to pre-crisis highs but we believe it can rise further in the medium term. Eurozone unemployment has been falling steadily over the last two years and is now showing signs of falling at a faster pace. The chart below shows that the change in the unemployment rate is closely linked with consumer confidence. As consumer confidence increases consumers spend more, which boosts the economy and reduces unemployment. This in turn further boosts consumer confidence creating a virtuous cycle. This positive feedback loop still has plenty of room to run in the Eurozone given that unemployment remains very high and therefore has the potential to fall much further. 

Economic Summary for the week ended 14th Sep 2015

Eurozone GDP was revised up this week showing that the eurozone grew 1.5% year on year in the second quarter. The underlying data showed a continued recovery in domestic demand and net exports.

Whilst the European Central Bank recently revised down their GDP growth forecasts slightly, they still expect 1.7% growth in 2016. They have also highlighted that they are willing to expand their Quantitative Easing (QE) programme if necessary to support growth and inflation. Even without further easing, money supply has been picking up strongly and suggests that GDP growth should remain well supported. With money supply and the economy picking up, and the EuroStoxx 50 down near where it was when Draghi first announced QE back in January, this would suggest that European equities have upside potential from here.

Economic Summary for the week ended 7th Sep 2015

The FTSE All Share is down nearly 10% since May. As the school holidays draw to a close and investors return from their summer breaks, it’s worth noting that intra-year corrections of this magnitude are the norm rather than the exception. In 17 of the last 25 years the last four months of the year have delivered positive returns, with the average return in those positive periods being 8.0% for the FTSE All Share. We don’t believe this market selloff is the precursor to a recession and, if we’re right, history suggests there is money to be made before the New Year.

Economic Summary for the week ended 31st Aug 2015

Volatility hit record highs: both the S&P 500 VIX and Euro VSTOXX peaked at 40.8 compared to respective five year averages of 17.5 and 23.0. These global equity drawdowns were not foreseen, and some portfolios did suffer losses, but it is important to remember the long-term. If an investor had stayed fully invested in the MSCI ACWI over the past 14 years, their returns would be over 180% — yet, if this same investor had missed even just the 20 best days of the ACWI’s performance, their investment would be in the red.  Keep calm and stay invested.

Economic Summary for the week ended 24th Aug 2015

Markets reacted with the pound strengthening against the dollar, reflecting the likelihood of an earlier rate rise. Yet, global disinflationary pressures from cheaper Chinese imports and falling commodity prices could counteract a pick-up in domestic demand. Across the channel, Eurozone five-year/five-year inflation expectations dropped dramatically on the news of the Renminbi’s devaluation, as highlighted in the chart. Continued imported deflation could force the ECB to extend its quantitative easing programme. When predicting central banks’ next moves across the world, investors would be wise to listen to Socrates: “The only true wisdom is in knowing you know nothing”.