Investment Newsletter April 2013
Spring Loaded The past month has seen renewed volatility in the equity market. The FTSE 100 closed at 6,529 on 14 March, before slipping back as low as 6,249 on 5 April. By 11 April it had recovered somewhat to close at 6,416. Renewed volatility in global equities came from a number of sources, with the clumsily handled bailout of Cyprus a major factor. Disappointing jobs figures in the US also contributed, as did bird flu reports in China and tensions in Korea which particularly affected Asian markets. This is the first real bout of volatility we have seen in 2013, apart from a 100 point drop or so when Italy failed to elect a new government. However, markets have proved remarkably resilient. Away from the UK, both the S&P 500 in the US and the Nikkei in Japan have hit new record highs in the past few days. Stimulus from both the American and Japanese central banks has contributed as investors become more confident about these economies and the global economy in general. This stimulus is meaning we are seeing some slightly strange developments in markets. As expectations of economic recovery increase, we would normally see equities rise – as they have been - and government bonds fall. However, we are seeing government bonds in the US and UK actually rise in value, meaning the yields have dropped back towards the lows we saw last year. Another asset class that has outperformed in the past few years due to fears about the economy has been gold. However, 12 April saw one of the biggest ever one day drops in the gold price of over 5%. As I write it is priced at $1,413 per ounce, down around 25% from the highs of $1,900 per ounce in 2011. So which is right, the equity or the bond markets? Are gold investors right to be selling? Only time will tell. However, the continued quantitative easing and the new stimulus in Japan are certainly distorting markets. We suspect that the global economy will continue to slowly improve, driven particularly by the US. This could help push equities higher, but we do not expect a corresponding sell off in bonds. Instead, we think government bonds could drift along, making no real gains or losses, perhaps with yields rising slowly over time.
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