Market Outlook

What happened over the first quarter of 2016?

Read what we expect to happen in the next quarter >

Market Performance

Market Performance Performance Q1 2016


Past performance is not a reliable indicator of future results.
Source: Morningstar Direct as at 31st March 2016. Total returns in GBP.
Indices used: FTSE All World Ex UK TR GBP, FTSE AllSh TR GBP, S&P 500 TR USD, FTSE Europe All Cap Ex UK TR USD, MSCI EM IMI GR USD, Topix TR JPY, MSCI AC Asia Pac Ex JPN GR USD, MSCI Sector indices, Barclays Global Agg Float Adj TR Hdg GBP, FTSE Gilts All Stocks TR GBP, Barclays Gbl Infl Linked UK TR GBP, JBM GBI US Traded TR USD, JPM GBI Global European TR EUR, BofAML Global HY Hdg GBP, FTSE EPRA/NAREIT Developed TR GBP, Oil Price Brent Crude PR, Gold London AM Fixing PR USD.

Market Performance Performance over five years


Past performance is not a reliable indicator of future results
Source: Morningstar Direct as at 31st March 2016. Total returns in GBP.
Indices used: FTSE All World Ex UK TR GBP, FTSE AllSh TR GBP, S&P 500 TR USD, FTSE Europe All Cap Ex UK TR USD, MSCI EM IMI GR USD, Topix TR JPY, MSCI AC Asia Pac Ex JPN GR USD, MSCI Sector indices, Barclays Global Agg Float Adj TR Hdg GBP, FTSE Gilts All Stocks TR GBP, Barclays Gbl Infl Linked UK TR GBP, JBM GBI US Traded TR USD, JPM GBI Global European TR EUR, BofAML Global HY Hdg GBP, FTSE EPRA/NAREIT Developed TR GBP, Oil Price Brent Crude PR, Gold London AM Fixing PR USD.

Outlook on the next quarter

The outlook for the next quarter is dominated by short-term events, primarily the EU referendum and potential Brexit. Shortly after that the US election will come into focus. Below we highlight our thoughts and discuss the issues that are foremost in our minds.We also reiterate our long-term investment themes which we believe can enhance your wealth. These are always good to come back to when there is a lot of noise and volatility in the markets.

United Kingdom

We have a strong labour market with record employment and this is boosting consumer confidence. If you exclude the oil and commodity sectors company earnings have held up well and their share prices are relatively cheap and offer attractive yields. We suspect share prices will remain subdued after the referendum vote and short-term volatility may provide trading opportunities.

United States

The market has been led by growth technology and consumer stocks like Facebook and Amazon. Value stocks however have been left behind and, as a result, are looking attractive again. Overall the market should benefit from a growing economy but being selective is key to staying ahead in this market. Impending interest rate rises together with the election fever, should keep volatility in the market this year.

China

China is still growing at around 6% pa. Retail sales continue at around 10% year on year.

The outflow of reserves has slowed and the panic has subsided. China's challenge is to switch from being an export-led economy to domestically focused without a so-called "hard landing".

Its neighbours in Asia are also growing well and share prices look attractive.

Japan

The market has fallen this year on the back of the stronger Yen. Investors have treated Japan as if it was one large exporter. However domestic consumers have not been spending either; the sales tax introduced last year has undone some of the stimulus that Abenomics has successfully introduced. Meanwhile Japanese companies are increasingly internationally competitive, profitable and shareholder focused.

Emerging Markets

These markets rallied strongly towards the end of the quarter. We believe we have moved out of the phase of indiscriminate selling and these markets should stabilise. As a group they are cheap relative to developed markets but there are large differences between the fortunes of the countries within, depending whether they are oil exporters or consumers. Dividend yields of 6-7% are attractive and compensate for potential risks.

Europe

Growth is returning and unemployment is falling albeit from very high levels. After long periods of stagnation, companies are starting to recover, thanks to lower borrowing costs and lower oil prices. The European Central Bank (ECB) has reduced interest rates below zero to encourage banks to lend and is printing €80bn a month. However there is also a Brexit vote in the UK to consider.

Brexit

The UK market will be volatile while we await the outcome of the referendum. Once the vote is announced the market’s immediate reaction will be binary. That is we expect there will be a relief rally if we stay in because we can revert back to business as usual. If the Brexit vote camp wins it, we expect marks to fall sharply with underlying uncertainty about the next steps.

Oil and commodities

These sectors are in recession. The most notable distressed company is Tata Steel in the UK. Defaults in the corporate bond market are at a seven-year high led by US oil and mining companies. The breakeven value for oil for most oil companies is $60 a barrel, so even though the oil price has stopped falling and has stabilised to around $40 a barrel it is still outside most companies’ comfort zone. Until we see more of a recovery there will be more distress stories.

Interest rates and central banks

The US Federal Reserve (Fed) is carrying out a very difficult balancing act. It knows its home market is ripe for rising interest rates as growth in jobs, wages, activity and recently inflation point to gradual interest rates rises. However, the Fed is mindful of fragile global markets and the strength of the dollar. The Bank of Japan (BoJ), and the ECB have introduced negative interest rates in an effort to encourage lending and economic activity and raise inflation.

This raises concerns about how involved central banks should be in leading global economic growth and whether the "market" should take over? Low and negative interest rates are in the long term are damaging for savers and the commercial flow of money generally. This is the world’s biggest conundrum and it’s going to take a while to sort it out.

Themes: 2016 and Beyond

Overall it pays to be brave and stay invested. As Martin Wolf wrote in the FT in January, the world economy has grown every year since 1946, even in 2009 at the height of the financial crisis. Innovations have been at the heart of this growth and there is no reason to foresee innovation running out of steam. We continually highlight opportunities to invest in these themes in our investment reviews and comments, which can be found on our News and Views pages.

Disruption

Newer, more forward thinking companies are challenging the big, established players across a range of industries. They are shaking up their relevant market sectors by adopting different, innovative business models and making use of leading edge technologies. Industrial jobs and processes are being impacted by technologies like automation, artificial intelligence, nanotechnology and the Internet of Things.

Sustainability

Sustainable investors typically look for innovative, growing companies delivering products or services which are helping to make the world a better place. Evidence shows those companies which adopt sustainable business practices are doing better than those which do not.

Income

Income is increasingly important as we are all living longer and likely to spend more years in retirement. Companies in the UK have a long and established track record of growing sustainable dividends streams. There are also opportunities across the globe, with the Asia and emerging markets income stories looking interesting. Other income sources are infrastructure, property and high yield bonds.

Preservation

One of the key aims for most investors is preserving their capital – put simply, not losing any of their money. Absolute return funds can be a useful addition to portfolios as a useful diversifier.

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