Accommodative central banks continue to support markets
1 October 2014 – 31 March 2015
Several important trends affected stock markets globally in the six months to 31 March 2015. These included the continued sharp declines in the global oil price, the strengthening US dollar against most other currencies in anticipation of Federal Reserve (Fed) interest rate rises, and the pursuit of loose monetary policy by most of the major central banks—in particular, the European Central Bank (ECB) and the Bank of Japan (BoJ). The investment environment was one that proved broadly more favourable for developed than emerging market stocks, with the MSCI World Index up 13.1%*, compared with a return of 6.7% for the MSCI Emerging Markets Index. Emerging market stocks were more affected by the oil price declines than their developed peers, and the tensions between Russia and Ukraine continued to have a negative impact on the asset class.
UK: Economic recovery remains on track ahead of the May general election
The UK stock market was volatile over the six-month period as the global oil price fell sharply. The FTSE All-Share Index returned 5.3%, with significant gains registered in the first three months of 2015, following a tumultuous final quarter of last year. The UK index has relatively high exposure to energy stocks, and these were supported by the modest recovery in the global oil price in the first quarter. UK smaller companies, which tend to benefit more from economic recovery than large- and medium-sized companies, outperformed over the six-month period.
The UK economy continued to grow strongly over the period and reached an important milestone as wage growth climbed above the rate of consumer price inflation in September for the first time in five years—leaving the average employee better off in real (inflation adjusted) terms.
January 2015 marked an upbeat start to the year for the UK manufacturing sector, which showed a rise in both output growth and new orders for the month, with the domestic market the primary driver. Meanwhile, in its February Inflation Report, the Bank of England (BoE) noted that UK consumer price inflation was 0.5% in December, well below its 2.0% target. The BoE attributed weak inflation to the fall in wholesale energy prices over the second half of 2014. UK labour market conditions continued to strengthen, with the unemployment rate for the three months to the end of December 2014 at 5.7%, down from 7.2% over the same period a year earlier.
Investors were focused on the path of the BoE’s monetary policy over the period. With UK headline inflation hovering around an all-time low towards the end of the six months, a growing consensus among investors was that UK interest rates would remain on hold until early 2016. In March, investors were bracing for heightened market volatility ahead of the UK general election in May, the outcome of which remained uncertain.
Europe ex UK: Powerful European Central Bank action boosts investor sentiment
European stocks had a strong six months, with the MSCI Europe Index returning 8.3%. Decisive action by the European Central Bank (ECB) to support the eurozone economy and exert upward pressure on prices was an important factor behind the solid gains of markets in the region over the period.
Germany was among the top performing markets globally, with the DAX rallying 17.3%. Swiss stocks also outperformed, with the SPI rising 12.9%. The Swiss National Bank’s surprise decision in January to remove the Swiss franc’s peg against the euro—which sent the Swiss currency spiralling and raised concerns about the competitiveness of domestic exporters—failed to significantly dent stock market returns in the short term. Meanwhile, France’s CAC 40 (+6.5%), Italy’s FTSE MIB (+3.1%) and Spain’s IBEX 35 (+1.0%) also made gains.
The focus of investors at the start of the period was on the continued weakness in global oil and other commodity prices, and the detrimental impact on energy sector companies. However, the broad European index has relatively lower exposure to energy companies than its peers globally. Therefore, while market volatility was pronounced towards the end of 2014 and early in the new year, sustained gains were more typical of the six-month period as a whole. The impact of commodity price weakness on inflation was significant, however, with inflation in the eurozone falling into negative territory in December.
Given that persistently low inflation can impede economic growth and make it harder for indebted countries to reduce borrowings, it came as no surprise that expectations for further action from the ECB—including the previously unpalatable purchases of government bonds, rather than just private sector assets—grew over the period. The Greek debt crisis also rumbled on, with a failure by the incumbent Greek government to secure the election of its candidate as president triggering a general election in January 2015. The election brought into power the anti-austerity Syriza party, which triggered tense discussions creditors. However, with ECB support underpinning the euro, European markets by and large shrugged off the concerns about Greece.
In January, the ECB finally undertook decisive action with the aim of jolting the eurozone economy back to life. ECB president Mario Draghi announced a programme of government bond purchases that exceeded the expectations of most market participants in terms of scale. The full effects of the ECB’s actions will only become clear over time. However, in the short term, increased monetary accommodation has sent the euro lower and further depressed bond yields, supporting eurozone exporters and boosting demand for higher-yielding assets such as equities. A sustained recovery in corporate earnings growth would lend further support to European stock markets.
US: Federal Reserve keeps investors on their toes
The US stock market delivered a strong positive return over the six months, with the S&P 500 Index rising 15.7%. Gains were stronger in the first half of the period, followed by more volatile returns in the first quarter of 2015 amid some signs that the US economic recovery may not be as well-entrenched as previously thought.
The Federal Reserve (the Fed) kept investors guessing as to the timing of its first interest rate increase, with small changes to the wording of Federal Open Market Committee statements bringing the prospect of a rate rise ever-closer. Many commentators were of the view that a US rate rise in June or September 2015 could be on the horizon. Oil price volatility, meanwhile, provided an uncertain backdrop for investors in the US.
The US economic recovery remained ahead of most of its developed market counterparts despite a slowdown in the first quarter. Labour market conditions continued to improve, with the US unemployment rate falling from 5.9% at the start of the period to 5.5% in February 2015. On the inflation front, oil price weakness exerted downward pressure on prices, with US consumer price growth turning negative month on month in November through to January. The consumer price index increased 0.2% month on month in February, however.
The outlook for the US manufacturing sector weakened somewhat, with the Institute for Supply Management’s closely-watched Manufacturing Index suggesting that the pace of growth slowed during each month of the period. The strength of the dollar against most other major currencies weighed on the prospects of US exporters. The currency rally was in part attributable to the increasingly loose monetary policy outside of the US, which tends to send currencies lower—while the US is moving towards tighter monetary policy, which is supportive of the dollar.
Japan: Investor confidence in Japanese companies grows
Japanese stocks were among the strongest performers globally over the six months, with the TOPIX gaining 17.3%. A falling Japanese yen and a declining oil price provided a favourable environment for domestic companies.
The Bank of Japan (BoJ) remained committed to its expansive quantitative easing programme, with some speculating that it would add to its existing government bond purchases. The BoJ has struggled to sustain the positive upward trend in prices that it managed to kick-start, with the rate of consumer price inflation falling short of the bank’s 2% target. The year-on-year increase in the inflation rate is likely to slow for the time being, reflecting the decline in energy prices, according to the BoJ.
The weakness of the yen against other major currencies has benefited Japanese exporters, by boosting the competitiveness of their products in international markets and increasing the value of foreign earnings when converted back into yen. Meanwhile, the lower global oil price has reduced input costs for many Japanese companies. Both trends are likely to continue to lending support to the Japanese stock market.
Emerging markets: Highly differentiated performance among individual stock markets
The 6.7% return of the MSCI Emerging Markets Index for the six months masked the highly differentiated performance of emerging market stocks on a country-by-country basis over the period. The Indian and Chinese stock markets were among the strongest performing globally, while Brazil and Russia were significant laggards.
Emerging market economies—particularly those that are net energy exporters—were disproportionately more exposed to the adverse impact of the weak oil price. Russia in particular suffered in a weak oil price environment, and was also negatively affected by sanctions imposed by the US and Europe that impeded the international operations of its companies. Brazil’s energy sector, meanwhile, was dragged down by a corruption scandal that ensnared state-owned oil producer Petrobras towards the end of the period.
In contrast, Indian and Chinese stocks staged sizeable rallies over the six months. Investors continued to welcome the Indian government’s progress in implementing market-friendly reforms under the leadership of prime minister Narendra Modi. Meanwhile, the increasingly accommodative monetary policy of the People’s Bank of China lent support to the domestic stock market. Measures aimed at improving the Chinese property market in particular supported real estate-related companies.
Important information
This is for information only and does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. Any forecasts, opinions and statements on financial market trends expressed are those held by J.P. Morgan Asset Management at the time of going to print and may be subject to change without notice. There is no guarantee that any forecast made will come to pass. JPMorgan Asset Management Marketing Limited accepts no legal responsibility or liability for any matter or opinion expressed in this material. The Information in this report is based on our understanding of law, regulation and revenue and customs practice at the time of print. The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. Past performance is not a reliable guide to future performance.
*Source for all market index returns in this document is Factset, as of 31 March 2015. Total returns gross of dividend taxes, in sterling terms.