Investment Newsletter February 2015
Rising Markets, Falling Prices Mike Deverell Investment Manager
Stockmarkets have rallied in the past few weeks after a shaky start to the New Year. After ending 2014 at 6,566, the FTSE 100 twice dipped below 6,400 in January, most recently closing at 6,388 on 14 January. From there it staged a spectacular recovery reaching over 6,832 on 23 January, a 7% move in little more than a week. Since then, markets have been flattened off, fluctuating around the 6,800 mark. The catalyst for this rally was the announcement from the European Central Bank (ECB) that they would finally carry out true quantitative easing, a full six years after the UK and US did the same. The ECB will be electronically “printing” 60 billion Euros a month from now until September 2016. Their intention is to stimulate the European economy and get inflation back, close to their 2% pa target.
Inflation in the UK was at 0.5% in December, partly as a result of falling oil prices, whilst in the Euro area it was MINUS 0.2%. Deflation is something that central banks want to avoid at all costs. There is an argument that you can have short term “good deflation” where low fuel prices (for example) act as a mini tax cut, meaning consumers have more money in their pockets. However, if deflation becomes entrenched it can result in a vicious spiral where consumers stop spending in anticipation of cheaper prices, resulting in weaker economic growth and more deflationary pressures. How effective quantitative easing is at tackling growth and deflation worries is still a matter of debate. However, it does appear to have an effect on asset values. The newly printed money is used to buy government
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