18 June 2013
Market Unease Persists Investors’ general sense of uncertainty (particularly over the future direction of Federal Reserve policy) continued last week, as stock markets sank for the third time in the last four weeks. For the week, the Dow Jones Industrial Average lost 1.2% to 15,070, the S&P 500 Index declined 1.0% to 1,626 and the Nasdaq Composite sank 1.3% to 3,423. In fixed income markets, yields remained volatile, although US Treasury yields bucked their recent trend by moving slightly lower over the course of the week (prices move in the opposite direction of yields). For the week, the yield on the benchmark 10-year Treasury fell from 2.17% to 2.13%. Concerns Over Feds Policy Appear Overwrought One of the primary causes of higher levels of volatility and increased selling is the fact that investors are attempting to position their portfolios for a coming shift in US monetary policy. That is one of the reasons money is flowing out of emerging markets: there is a perception that emerging market countries will be negatively impacted by a tighter monetary policy given that a less liquid environment in the United States could translate into diminished demand. While we believe it makes sense to focus on US Fed policy, recent reactions appear to be extreme. It is likely that the Fed will begin to taper its current policy at some point later this year or by early next year, but any movement by the Fed will be gradual (and communicated well in advance) given that large segments of the US economy are still quite lethargic. We saw more evidence of this in last week’s economic data. While May’s retail sales figures were better than expected, the manufacturing sector remains weak. May’s industrial production report confirmed that manufacturing levels continue to slow. Industrial production grew at a scant 0.1% in May, this was well below expectations and one that followed two straight monthly declines. Even when the US Federal Reserve does begin to move toward a less accommodative monetary policy, the effect of the tapering may be more muted than many investors anticipate. To be sure, the Fed will be buying fewer Treasuries when this happens, but with the US budget improving (at least temporarily) the available supply of Treasuries will be lower. Additionally, other central banks (not to mention pension funds) around the world remain large buyers of Treasuries, which should help maintain demand levels. All of this suggests that when the Fed does begin to taper, the backup in yields should be tempered.
Global Outlook The economic backdrop in the main economies remains ‘ok’ for risk assets. In any event, most investors think that any economic weakness would produce a policy response. Growth in the US is sub-par by historic standards but, importantly, it is stable, which has reassured investors considerably. Brighter spots, such as the housing market, have also helped in this regard. Eurozone growth is more problematic but the relative stability in the periphery has been an important offset to a weaker economic backdrop. Expectations for Chinese growth, which dominates the Asian growth picture, have been pared back and investors are reasonably cautious of the region for now. Goods’ and wage inflation globally remain modest and recent readings for consumer prices in the US and Europe have been weak. Given that backdrop, a very loose monetary policy is regarded as essential for several of the major regions. Therefore, short rates are likely to stay at ultra-low levels for a protracted period to come. Nonetheless, investors are becoming more sensitive to any indicators that the Fed will ‘taper’ the extent of its policy generosity. Other central banks are generally neutral in their stance. As for the ECB, analysts expect that it will stay highly accommodative during 2013 and it will likely deliver further policy initiatives. Historically low long-term interest rates in many countries will likely remain as long as central banks sponsor a low interest rate structure. Low inflation globally reinforces the likelihood that this situation persists. Thus, the recent modest rise in long-term US and German interest rates is not likely to be the start of an immediate large scale rise in rates; we expect these rates to fall back over the coming weeks. Meanwhile, confidence in the ability of the ECB and policymakers to manage the peripheral debt situation currently remains very high. Some might argue that this confidence borders on complacency but, to date, the turn-around in investors’ attitudes has been impressive. Equity markets are within historic valuation ranges – albeit now closer to the top of that recent range. Most market strategists see equities as being much better value than bonds and, additionally, the general view is that equities are also being supported by central bank liquidity. The recent dramatic volatility in Japanese equities illustrates how corrections can easily occur in strongly trending markets. Nonetheless, most investors remain inclined to buy any setbacks that may happen there or in other markets. While the S&P US equity index is only a couple of percent below a recent high, other markets have been slightly weaker recently and we anticipate that the current setback can run a little further. Currencies The dollar weakened over the week, caused partly by economic data which might result in reduced stimulus measures. The €/$ rate finished the week at 1.33, a strengthening of 1%. Commodities Oil prices rose for another week, on the back of continued tensions in Syria, home to roughly a third of the world’s oil supply. Brent crude oil closed just below $106 per barrel, a rise of almost 2% on the week. Gold prices finished the week fractionally higher.
Bonds Spain’s credit rating was affirmed at BBB- by S&P, which said that the country’s commitment to the implementation of a comprehensive fiscal, structural agenda remains strong. However, S&P’s outlook on the long-term rating remains negative, which shows potential for a further downgrade if the current reforms fail to work. Overall, the Merrill Lynch over 5 year government bond index finished the week unchanged.
House View Performance Thomond Asset Management maintains an investment house view on how we feel your funds should be invested with each fund manager. Below we have provided you with the performance of each of these managers on an annualized basis.
Fund Manager 1 Year Zurich 9.30% New Ireland 5.94% Standard Life 10.43% Aviva 7.70% Friends First 7.88% Irish life 11.75% *Performance provided by Financial Express
3 Year 18.47% 15.31% 22.66% 19.13% 14.30% 16.75%
5 Year 26.85% 17.21% 24.13% 30.14% 14.52% 35.78%
Note: The performance of the above portfolios may not directly correlate to an individual’s portfolio. Please speak with your financial advisor to understand your specific portfolios performance. Asset allocations between fund managers will differ.