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January was an extraordinarily eventful month: the Greeks voted against austerity, the European Central Bank launched a massive programme to purchase bonds, the Swiss National Bank removed its currency peg, the price of oil fell further, the Saudi king died and there were surprise interest rate cuts, while events in Paris brought into focus freedom of speech and those in Ukraine the role of Russia. This led to volatility but markets overall were positive.
The ECB, having dabbled with various policies and talked about quantitative easing, launched a massive programme to buy €60bn of bonds each month and said it expected to buy €1 trillion of assets by September 2016. The unhappy Germans stipulated that national central banks would be responsible for any losses although there will be risk-sharing for a fifth of the total. The ECB felt increasingly compelled to act as the risk of persistent deflation grew: in the euro zone prices fell by 0.6% in the year to January, a level matched only during the sovereign crisis in 2009; core inflation slipped to 0.6%. In spite of falling prices there are brighter signs with output in Spain growing by 0.7% in the fourth quarter, its fastest rate in seven years, and German consumption increasing.
However, there have been renewed fears for the euro zone following political developments in Greece, where in the elections Alexis Tsipras led the radical left-wing Syriza party to just short of an absolute majority, then swiftly signed a pact to govern with the hard right Independent Democrats, who also oppose the austerity measures that appear finally to have enabled an improvement in the economy but which the new finance minister has described as ‘financial waterboarding’. Tsipras chose as his first public act to visit a memorial to Greeks killed by the Nazis in 1944, an interesting move given that the Germans will be key to any resolution. There will be hard negotiations over the conditions set for the bail-out in 2012 and, as the rise in bond yields and fall in the share prices of banks portends, a risk that Greece will collapse. While it is an even smaller economy than before, the concern is still of contagion for other European countries, especially those such as Spain with elections pending and popular populist parties. The Greeks have given us many things over the years, including the words for drama, crisis and catastrophe, but it is unlikely to come to that.
It was probably because of the impending ECB action and the threat to the euro from the outlook for Greece that the Swiss decided to end the cap on their currency that they had established as long ago as September 2011, which prompted a remarkably sharp move in the exchange rate and which is likely to tip the country into a short-term recession given its impact on tourism and exporting companies – although the Swiss franc has given up already a proportion of its initial gains. The Swiss moved their deposit rate to -0.75% to deter investors. Other interesting moves in interest rates included a cut in Canada, where the falling oil price has been a concern, a cut in India where the economy is growing well yet inflation is steady and a Putinesque reversal in Russia from 17 to 15%.
The new king in Saudi Arabia is unlikely to prompt a change in their policy to maintain production, a factor in the further fall in the price of oil, which has been followed by weakness in other commodities as investors or speculators considered the prospect of diminished demand. There is a worrying correlation with political instability in countries that rely on oil revenues, such as Russia and Nigeria. There has also been much debate on the strength of the global economy. The IMF is still concerned with its Managing Director Christine Lagarde calling the growth pattern ‘too low, too brittle and too lopsided’; many countries still struggle with high debt and high unemployment.
In the US weaker overseas markets and lower exports were a factor in GDP growth fading to 2.6% in the fourth quarter, below expectations and the striking rate of 5.0% in the previous three months. Although exports are a lower proportion of the US economy at 13% than in many countries, trade is important. Corporate earnings have also been impacted by the stronger dollar which was up 8% in December on a trade-weighted basis against a year earlier. Consumer confidence remains high as unemployment is likely to fall further to 5.8% and there is some evidence of wage inflation: the Employment Cost Index was up 2.2% in the last quarter. Overall inflation remains subdued with the stronger dollar and lower oil price (the Federal Reserve does not expect it to rise to its target level of 2% before 2018). The timing of the rise in interest rates has slipped from April, but could still surprise in spite of the Fed’s patience.
While the IMF sees the US as the only engine of growth, that in China is still working well if spluttering a little. The country reported GDP growth of 7.4% for 2014, which was at its lowest level since 1990, when sanctions had an impact after the Tiananmen Square killings in 1989, but still impressive. The rate of growth in property investment halved to 10% and property sales were down 8%. As GDP figures in the country are of debatable quality it is perhaps helpful that the city of Shanghai has decided no longer to set a growth target.
Elsewhere the picture in Japan is still mixed, with inflation below target, while in the UK economic growth in 2014 was reported at 2.6%, its highest level since the financial crisis, although the rate slowed to 0.5% in the final quarter. Campaigning for the general election in May has continued and the prospect of no clear-cut winner may become an increasing concern.
In spite of that, over the course of January the FTSE 100 index rose by 2.8% to close at 6749; mid-sized and smaller companies lagged a little with the FTSE 250 and the FTSE SmallCap indices up by 1.4% and 1.2% respectively in the month. In the US the S&P 500 fell by 3.1% and the technology-oriented NASDAQ index by 2.1%. In Europe the EURO STOXX 50 index was up by a notable 6.5% with the German exchange leading the way following the ECB’s move. In Japan the Nikkei 225 index rose by 1.3%. The small rise in the MSCI Emerging Markets index of 0.6% marked a wide divergence, with the Russian exchange bouncing 18% but Latin America weak. Bond yields fell sharply in the month and the UK 10-year gilt moved from 1.76% to 1.33%; the FTSE Gilts All Stocks index delivered a return of 4% in the month, continuing its record in the last year.
Sterling was down 3.3% against the US dollar at a rate of $1.51:£ and 3.6% stronger against the euro at €1.33:£. The euro was down nearly 7% against the US$ while the Swiss Franc rose sharply, closing up over 10% against sterling at CHF1.39:£. The price of gold rose further by 8.4% to $1284 per troy ounce. Copper was down 12%, while the cost of a barrel of Brent oil dropped further over the month to $53 and is struggling to find a floor.
It has been a lively start to what is likely to be a challenging year, in which growth, inflation and interest rates will be subdued and value elusive, but in which we will continue to find investments with intrinsic potential in portfolios that are diversified to reduce risk.
Julian Cooke – Investment Director 2nd February 2015, Vintage Asset Management
All views are the authors own and do not represent those of SG Financial Services Limited.
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