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8th April 2016
Market Commentary April 2016

market commentary

Was Mark Knopfler prophesying future economic conditions with his 1980s hit ‘Money for Nothing’, or even with his band's name (Dire Straits, for those not in the know)?

Since the collapse of Lehman Brothers in 2008, central banks across the globe from Washington to Warsaw have cut interest rates over 600 times. A staggering figure, which amounts to a cut about every three working days. We are now in the previously uncharted economic waters of negative interest rates in many countries, essentially being a tax on holding money in a bank account. Yet with all of this monetary easing, is the world in a materially better economic position?

The first quarter of 2016 started with fears over a global recession beginning to crescendo due to a persistently slowing Chinese economy and an oil price that could not stop falling. The climax came in mid-February when the UK market came crashing down, by 12% from the start of the year. Whilst economic conditions had not dramatically deteriorated, the merriment of the festive season had evaporated and more attention was paid to fundamental conditions. However, global central banks came to the rescue with another bout of Quantitative Easing, further lowering of interest rates and the soothing coos of the central bank doves (policy makers who prefer low interest rates). This triple bout of stimulus was enough for markets to rally aggressively and finish the quarter where they started. An uneventful quarter for the unobservant onlooker.

Whilst the market has been firmly focussed on global issues in the first quarter, our expectation is for the impending EU referendum to start driving markets. The rhetoric has certainly intensified on both sides over the last few weeks, but arguments still seem to be lacking a sense of lucidity, which makes it a debate of the heart and not head at present. The market and economy are fearful of this uncertainty with sterling depreciating 13% since November and business leaders delaying investment decisions until the vote is over. Whilst this has not begun to filter into economic statistics yet, it will certainly start to affect the economy, especially if the so far resilient consumer decides to delay spending decisions. Though it must be noted that the increase in the National Minimum Wage to £7.20 an hour should buttress the health of consumer spending, but at the expense of the employment numbers. This increase in wages may have a mildly inflationary impact on the UK economy but the headline rate of inflation still remains at a paltry 0.30% compared to house price inflation running at 5.70% – the result of a chronic lack of house-building.

Elsewhere in the world, economies continue to muddle along, with no clear direction of travel for many countries. The American economy continues to plough ahead supported by a consumer benefitting from low oil prices and improving wages, a stark contrast to US corporates that are struggling with a slowing Chinese economy and poor sales growth. In Europe, the increased monetary easing is not flowing into materially better economic data and the political classes are having to deal with the barbarism of terrorism coupled with the influx of refugees from a volatile Middle East. When the state of the Chinese economy and the future President of the United States are added into the equation, a picture of a deeply uncertain world is painted. So trying to find stability remains a priority for many and helps formulate our investment thinking. Balancing risk with return remains key for us; and thus we are taking a more cautious approach to portfolio construction. In a world with low and no interest rates, we continue to believe that investment in companies with proven business models and good levels of dividends remains sensible.

As well as singing about 'Money for Nothing', Dire Straits also sang about Romeo and Juliet. It’s easy to see similarities between those two star-cross’d lovers and central banks and markets today: central banks playing the part of Romeo serenading the markets, whilst the anxious Juliet sings back, ‘Anyway, what you gonna do about it?’ Let us hope that there is a happier ending to this story than the original.