In this week’s bulletin:
- The Fed’s confidence in the health of the US economy highlights continued support for further tapering of QE.
- The recent flurry of corporate activity suggests that confidence is returning to corporate boardrooms.
- Emerging markets offer up value opportunities for long-term investors as the recent sell-off may have been overdone.
- Inflation falls below target but savers should remain cautious on the real returns from deposits.
Major markets forge ahead
A greater sense of optimism, from the same region that gave rise to volatility in developed markets in previous weeks, was last week the catalyst for positive returns from global equity indices. Whilst many commentators were quick to highlight the renewed sense of confidence that growth of the US economy is ever sustainable, signs of greater stability in emerging markets – with the notable exception of Ukraine, which faces its own well-documented social and political challenges – further underpinned an increased appetite for risk.
In the US, the S&P 500 index came within a whisker of setting a new high – reached last month – and recorded a third successive weekly gain. A robust report on US manufacturing activity published on Thursday, showing activity this month growing at the fastest pace since May 2010, continued to offer support as the largest market on the globe continues to press forwards. The data encouraged participants to dismiss recent signs of weakness in the US labour and housing markets as being largely due to adverse weather conditions. Furthermore, the Federal Reserve appeared relatively confident about the health of the economy, according to the minutes of January’s Federal Open Market Committee meeting, highlighting continued support for further tapering of the central bank’s monthly asset purchases barring any shift in economic conditions.
Back in London, investors saw the headline FTSE 100 index finish at an eight-month high after an increase over the week of more than 2.5%. Equity bulls and historians will point out this is now just 1.3% below the record high of 6,930.20 posted at the end of 1999. The standout performer in the final day’s trading was Vodafone, which rose over 3% as bid speculation pushed the mobile operator to 236.5 pence per share. The FTSE has now risen almost 7% from a recent low earlier this month.
In Europe, the FTSEurofirst gained 0.8% over the week, buoyed by the strength of returns from the French market which led the way relative to the rest of the region. In a similar story to the US, this represents a third straight week of gains from the European index. Elsewhere, Japan rallied and bucked the trend of losses over the previous six weeks by posting a significant weekly return of almost 4%.
Go forth and multiply
Equity investors do not appear to be lacking in confidence as the rise of global equity markets clearly demonstrates. Indeed several big headlines in recent weeks point to further evidence of growing optimism for the wider global economy. Renewed mergers and acquisitions activity is feeding the hope that companies are becoming increasingly confident to put large piles of cash to work.
A selection of multi-billion-pound deals from the healthcare, media and technology sectors over the past two weeks was crowned on Wednesday by the announcement of Facebook’s $19 billion acquisition of mobile messaging company, WhatsApp.
Many professional investors are waiting to see whether 2014 will bring with it the confidence that corporate boardrooms failed to find in 2013. Luke Chappell of BlackRock says, “UK corporates have strong balance sheets but low confidence levels and have been returning cash to investors in the form of dividends and share buybacks. We expect corporate activity will pick up in 2014, translating into increased capital expenditure and M&A activity.”
This lack of confidence is less likely to be repeated over the next 12 months, agrees Richard Peirson of AXA Framlington; but he warns investors against expecting this to drive equity returns at the levels seen last year. “Companies’ balance sheets are strong; while financing costs, interest rates and bond yields are all low, so borrowing for companies is cheap and acquisitions are almost certainly earnings-enhancing. Management will be more confident that the economic background is improving and will take advantage of the low financing costs to make more acquisitions. However, UK equity valuations are at a reasonable level, which could translate into greater than single-digit growth for 2014 but not at the 20% level we saw last year.”
Will value emerge?
The emerging markets have endured something of a rollercoaster since the turn of the year. Fears of a currency market collapse and risk of contagion, social and political unrest and questions over the success of central bank policies have all proved worrying headwinds. Whilst the region has toiled, and investors have continued to fuel a sell-off in emerging equity markets, developed markets have pushed ahead.
However, the dislocation between economies and companies – a point many commentators would identify with the situation witnessed in Europe over the past few years – could be offering up an opportunity for investors willing to take a long-term view.
Value investors with a focus on the developed, Western markets have faced a difficult challenge over the past couple of years as valuations have forged ahead, driven on by an ever-increasing appetite for so-called ‘risk assets’. The ability to identify those companies that have fallen out of favour and are priced at a ‘discount’ to their true market value becomes increasing tough as everything, it seems, has appreciated.
Yet with the recent sell-off in the emerging markets, this presents a fantastic opportunity for the long-term investor, says Hugh Young of Aberdeen Asia. “It’s interesting to see the revulsion against emerging markets now. To me it seems illogical. Logical when you look at the economies, but illogical when you look at the companies.” With the benefit of over three decades in the fund management industry, Young believes that things may just be a little overdone. “It feels as though the tide has swung too far. My intuition as an investor is there is some good value coming out of here. The market was trading at 15 times earnings before and now we’re at 11 times. Value is certainly returning and anyone who has a long-term view will be dipping their toes back in.”
Whilst the risks have by no means passed, and there may be further bumps in the road, Young maintains a sense of optimism that, alongside the new opportunities that may arise, the current portfolio is well positioned. “The businesses we own are in good shape – balance sheets are strong and management continues to be focused, which is everything we look for.”
The saver’s conundrum
Last week brought confirmation that the rate of inflation fell below the Bank of England’s 2% target this week for the first time in more than four years. The Consumer Prices Index grew by 1.9% for the 12-month period to the end of January, falling from the 2.0% figure in December.
This news presents a double-edged sword – of sorts – for savers. Bank of England governor Carney will consider this a positive reinforcement of his stance that the bank rate will remain lower for longer.
Whilst they will acknowledge that interest rates will remain low on their accounts, some savers will take the positive view that, with inflation at a lower rate, the impact on the returns achieved by their cash deposits will be lessened. Whilst a fall in inflation below this ‘headline’ figure of 2.0% is a positive indication for the wider economy, the actual benefit for cash savers is less significant than many will assume. According to latest figures from Moneyfacts, the drop signals an increase of just seven in the number of inflation-beating accounts – there are currently 84 savings accounts, out of a total of 862 on the market, that provide a positive real return, compared to 77 in January. Of 235 Cash ISAs, just 53 of these tax-advantaged accounts currently offer rates that beat inflation. In the run-up to the end of the tax year, investors should consider how the tax benefits of their valuable ISA allowance can be maximised.
Recent data from the Bank of England also reveals that the amount held in ‘non-interest bearing accounts’ jumped by £21 billion in the past 12 months to more than £130 billion. Savings in fixed-rate bonds and notice accounts, which traditionally pay higher rates, fell by £38 billion – suggesting that savers’ apathy, given that the returns from deposits have been poor for so long, could be costing them further.