Synopsis: After a strong 2013, markets had a distinctly jittery January
As we commented in our earlier Bulletin, most world equity markets had a good 2013, with the UK up 16.7% and the US rising by nearly 30%. There was even a somewhat late Christmas rally to round things off. However, 2014 has got underway on a much less buoyant note, as the table below shows.
The bulk of the declines in the US, UK and Europe took place in the second half of the month, after what seemed like a continuation of the benign conditions of 2013. So what happened to prompt the reversal?
The answer to this pin-the-tail-on-the-donkey question is by no means certain, but there is a long shopping list of suspects:
- The developed markets were due a correction. Look at the graphs for 2013 and it is hard to find a correction (normally taken to be a 10% fall), despite the wobble of the late May taper tantrum.
- Central bankers are losing omnipotence. In the US and UK, ‘forward guidance’ has (re)proved that central banks are not the greatest of economic forecasters. The only way for short term interest rates in the long term is upwards and each day, the first increase gets nearer, whatever the guidance says.
- There are concerns that disinflation (falling inflation, as opposed to falling prices) may become a worry. Eurozone inflation is just 0.7%, US inflation 1.5% and even the UK is on target at 2.0%. That threat – and the usual flight to safety when markets wobble – explain why 10 year bond yields have fallen on both sides of the Atlantic.
- Corporate news has been disappointing. Companies are issuing more profit warnings and disappointing results – think Diageo and British Gas in the UK and Apple and Wal-Mart in the US, for example.
- QEasing is underway and the second cut, announced at the end of last month, will take $20bn a month off the table in February. That is causing concern in emerging markets, so much so the head of India’s central bank has openly criticised the Fed for ignoring global consequences when setting policy.
- Turkey has had a rash of inter-related political, interest rate and currency problems, all of which have served to remind investors of the risks in emerging markets.
- China is slowing and there are fears that a Chinese credit bust is near. The official Purchasing Managers Index dropped to a six month low in January as exports and new orders waned. One high profile wealth management product with the unlikely name of ‘Credit Equals Gold No 1’ was rescued from default last week by an unnamed third party, thought to be linked to the Government.
- Most commentators agree that whatever the metric, the US equity market is not cheap. That is not to say it cannot get dearer, but last year’s share price increases were due to rising valuations, not rising profits.
We have been here before last May, after Ben Bernanke raised the subject of tapering QE. As the numbers in the table show, for all the drama the falls have been modest…so far.
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