DIY Investor Magazine
/
December 2015
6
On the face of it, things seem to be improving; Global
powerhouse, the US, is growing and the US Federal
Reserve (Fed) is contemplating a rise in interest rates.
More normal lending rates will drive up yields on US
government bonds, which have reached absurdly low
levels. Most managers we know are avoiding these in
favour of higher yielding corporate debt. The feeling is
that rate rises will be small and the impact on pricing
modest.
We expect rates to rise very gradually, thereby avoiding
panicking markets and triggering a slowdown in
investment and consumer spending. Some managers
have been hoarding things like inflation-linked bonds
and gold in case the Fed allows economic growth to
accelerate too quickly and this translates into inflation.
The US Presidential election race is underway with
some alarming rhetoric being bandied about.
The only statements that have had much impact on
markets so far though have been Hilary Clinton’s
comments on curbing the prices of drugs which
has knocked the previously strong Biotech and
Pharmaceutical sectors.
A key driver of the US economic recovery has been
the phenomenal growth in the production of oil from
shale which has reduced imports. The decision by
Saudi Arabia to maintain levels of production and
the improvement in relations with Iran allowing it to
recommence legal exports, have combined to trigger a
collapse in the oil price. This has stymied the growth of
the shale oil industry but benefits the US consumer as
petrol prices have fallen.
The world is waiting to see how long the Saudis can
tough it out with a big budget deficit and falling foreign
exchange reserves.
With many investors struggling to figure out what is really going on with the global economy,
James Carthew
, Head of Research and Director of Marten and Co tries to make sense of it all
The UK economy appears to be echoing, but lagging,
that of the US with UK rate rises likely to be some time
off – possibly 2017.
The Conservative election victory was seen as positive
and triggered a re-rating of domestically focused
companies; however, that recovery is running of steam
and investment managers are looking for earnings
growth from companies for the market to move forward
decisively.
A looming issue that stirs up strong views is the
UK referendum on Europe; suffice to say that many
overseas asset managers are nervous about a BREXIT
(a UK exit from the European Union).
Europe was seen as the laggard in addressing the
issues that were holding back its growth. However with
Greece sorted for now, there are signs of a recovery
in many European economies and European smaller
companies have been outperforming larger ones;
again future market growth requires strong corporate
earnings.
So where are the problem areas? The most obvious one
is China. The world has become so reliant on Chinese
growth that the absence of it is depressing markets
across Asia. A US recovery is seen as bad news too
as US investors start to repatriate money to profit
from US growth. The slowing Chinese economy has
compounded the oil price problem and devastated the
suppliers of the raw materials. These companies now
trade on very low valuations. Some feel that things are
as bad as they are going to get and it is time to start to
rebuilding positions in this sector.
IT’S THE GLOBAL
ECONOMY, STUPID
THE WORLD IS WAITING TO SEE HOW LONG THE
SAUDIS CAN TOUGH IT OUT
