Second, indications by the European Central Bank (ECB) that it is considering extending its quantitative easing (QE) programme to stimulate economic growth in the eurozone. Third, signs that the Organization of the Petroleum Exporting Countries (OPEC) may reduce supply to raise oil prices. Recent terrorist attacks, including a Russian plane shot down over Turkish airspace and the atrocities in Paris, shocked the world but had limited impact on capital markets.
Oliver Wallin, investment director at Octopus, says: “There are reasons to be positive in the coming months, notwithstanding the current climate of geopolitical uncertainty. A well-managed communication from the Fed could turn a small rate rise into a positive for US economic prospects. More QE by the ECB will benefit European investments. Japan’s efforts to stimulate its economy should boost the value of investments there, too.
“However, there are still reasons to be slightly wary. It could be argued that economic growth prospects should be higher, given the efforts of central banks over recent years. We need to see more strength in global economic growth to be put at ease. Should nothing happen after the expected US interest rate rise, or should the Fed be viewed as making a policy error, then investors may need to rethink their strategies.
“We have adopted a fairly neutral position that keeps close to our long-term strategic asset allocations across our portfolios. We are leaning slightly in favour of equities, with a preference for Europe and Japan over other developed regions. As far as we are concerned, emerging markets are still to be avoided, so we have limited exposure there. In addition, we remain cautious of the risk to fixed interest investments if interest rates rise. As a consequence, we continue to prefer shorter-dated bonds and company rather than government bonds as a means to reduce that risk. Investments that offer an alternative to equities, bonds or cash continue to provide us with valuable and welcome diversification in our portfolios.”
November’s news
Fed ready for US interest rate take-off.Economic data from the US is supporting the case for a rate rise in mid-December. Only a major piece of bad news, such as geopolitical instability or unrest, would be likely to tempt the Fed to change tack. We did feel that the Fed had missed a trick by not raising rates back in September, when market participants had been expecting it. The delay has, in effect, created a more accommodating environment. However, a policy error, such as the Fed being too optimistic about US economic growth, could have dire consequences for markets. We’re expecting a 0.25% rise this month, with no further rises for some time afterwards.
Stimulating times for the ECB.Mario Draghi, president of the ECB, has just announced further QE measures. The ECB is already engaged in a large-scale programme of buying financial assets, mostly government bonds, to release money into the eurozone. It has extended its current programme but Draghi’s announcement was underwhelming. The market was expecting more and reacted by selling off, with the euro strengthening against the dollar.
This reflects the parting of ways between the Fed and the ECB. The Fed will be very conscious of the ECB’s actions and its potential effect on the dollar. Raising US interest rates while other economies are keeping rates low to encourage economic growth could increase the problems facing the Fed of a strong dollar. It will have a negative effect on commodities which are priced in dollars and those emerging markets, in particular, that are dependent upon commodities or whose currencies are linked to the dollar. The ECB’s stance could be viewed more positively for investors in the eurozone, as continued easing will support prices in both equity and bond markets there. It will also hold back the euro versus the dollar, which will be good for exporters. As a result, we are still looking at European investments more favourably than other developed markets.
OPEC eyes oil price rise. OPEC members are meeting early in December to discuss the oil price. Countries around the globe have enjoyed low oil prices for some time, fuelled by continued production from OPEC, Russia and others despite falling demand.
The US has built up its oil reserves to record highs, so any price rise will take time to be felt. But it seems OPEC may opt to reduce production to bring prices back up. This will increase inflation in countries that are net importers of oil, which may not be such a bad thing. Headline inflation rates in developed economies have been artificially suppressed by cheap oil. A clearer economic picture might emerge if an oil price rise leads to economies returning to more ‘normal’ conditions.
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