Market Commentary Q4 2014
Global equity markets ended the quarter broadly positive, following a period of increased volatility due to a number of adverse events.
Markets were nervous over the escalation of the Ebola virus and the potential severity, once it had spread to countries outside of West Africa. The IMF downgraded its global growth forecast slightly across 2014 and 2015.On a country-specific basis, there were sharp downgrades in Russia, Japan and the Middle East, while the US experienced a sharp forecast upgrade. The falling oil price was a headline topic with crude oil (Brent) falling around 40% over the quarter. The impact has been severe for many oil and resource sector companies as well as countries which are heavily reliant on oil revenues. Conversely, the falling price has led to lower fuel costs for consumers, which will contribute to economic growth within many developed economies.
US equity markets delivered strong returns and surpassed all-time highs over the quarter. Third quarter GDP rose to 5% q/q in its final estimate, beating market expectations. This was the highest level recorded since the third quarter in 2003 and was led by consumer spending, investment and lower imports. The US Federal Reserve announced the end to its quantitative easing program, reducing monthly bond purchases from $15bn to nil. Unemployment was unchanged at 5.8% in November, in line with expectations and around the lowest level in 6 years. Industrial production rose significantly to 5.2% y/y in November, as consumers spent more on cars, electronics, furniture as well as other goods given an increase in discretionary income. Inflation fell to 1.3% y/y in November, experiencing the greatest monthly decrease in 6 years. Lower energy costs was the largest downward contributing factor.
European equity markets were flat over the quarter, amongst a period of high market activity. The European Central Bank unveiled plans for its ‘private quantitative easing package’ early in the quarter. This included purchases of asset-backed securities and covered bonds which will be purchased over at least a 2 year period. Third quarter GDP rose to 0.2% q/q in its second estimate, in line with expectations. Household and government expenditure boosted the overall economy, while investment and external trade pulled the rate lower. Inflation fell to 0.3% y/y in November, in line with expectations. The fall was led by lower energy prices where deflation was recorded in 4 member states. Unemployment was constant at 11.5% in October, at around the lowest level in 2 years. Ministers in Europe approved a request from Greece for a 2 month extension to its bailout program, which was prepared to end on 31st December. The Greek Prime Minister, Antonis Samaras, announced that the country’s presidential elections would take place on 17th December. As the country’s new President was not elected, further elections will take place in late January.
UK equity markets were flat overall, buoyed by stronger returns from medium-sized companies. UK third quarter GDP remained unchanged at 0.7% q/q in its final estimate, in line with expectations. Household and government consumption were the largest contributors to economic growth. Inflation fell to 1% y/y in November, a 12 year low. The fall in inflation was largely a result of lower motor fuel costs as well as falling food prices. Wage growth increased to 1.4% y/y in the third quarter, outstripping inflation for the first time since March. The ONS announced UK house prices increased 12.1% y/y in September, with an 18.8% y/y rise recorded in London markets. This was the highest annual growth rate since 2007, although house price appreciation has reduced more recently.
Asian equity markets were higher encouraged by a surge in Chinese markets, as well as strong returns registered in Japan. Chinese third quarter GDP fell to 7.3% y/y, although was slightly ahead of expectations. The growth rate marked a 5 year low, driven by lower property investment, industrial production and credit growth. The Chinese central bank cut interest rates by 0.4% to 5.6%, to help boost economic growth. Inflation fell to 1.4% y/y in November which was a near 5 year low, well below the government’s inflation target for the year. Chinese authorities confirmed the integration of the Shanghai and Hong Kong stock exchange, improving trading and access for international investors.
The Bank of Japan announced significant increases to the scale of its quantitative easing program with the purchase of various assets. Japanese third quarter GDP rose to -0.5% q/q, slightly below expectations. The announcement placed the country in technical recession. Prime Minister Shinzo Abe immediately proposed postponing the planned second round VAT hike until April 2017, to ensure economic recovery. Abe then called for a snap election to secure support for his economic reforms, which he won with a two-thirds majority vote. Inflation fell to 2.4% y/y in November, an 8 month low, driven by falling oil prices and slower consumer spending. The rate was 0.7% y/y, when stripping out the impact of April’s consumption tax increase. Unemployment remained at 3.5% in November, unchanged from the previous month’s figure.
Emerging markets were marginally lower over the quarter, with much disparity among individual countries, largely driven by mixed reactions to lower oil prices. The fall in the oil price adversely impacted those emerging countries which are heavily reliant on revenues from energy exports. The fall has been subject to multiple factors including increased supply largely from the US and decreased demand from slowing economies. Over the period, OPEC agreed to maintain the supply of oil at current levels in the interest of restoring market equilibrium. This placed further downward pressure on the oil price, as many expected the organisation to cut supply and support prices.
Dilma Rousseff narrowly won the Brazilian presidential election on behalf of the Worker’s party. The Brazilian central bank raised interest rates by 0.5% to 11.75% in order to control inflation, which has been above its target range since June. The Russian central bank increased interest rates multiple times over the quarter including a 6.5% rise in a single day, to combat inflation and support the currency. The finance ministry later sold large quantities of its US dollar reserves for rubles in order to tackle further currency depreciation.
In fixed income markets, yields on government bonds fell leading to positive returns for investors. Yields on the UK, German and US 10 year bond ended the quarter at 1.79%, 0.55% and 2.21% respectively. The fall in bond yields was encouraged by lower inflation expectations, largely associated with lower energy costs. The increased expectation that the European Central Bank will eventually announce more aggressive quantitative easing measures helped drive bond yields lower in related markets.