A YEAR OF GOOD HOPE
Sebastian Lyon, the manager of the excellent Trojan Fund, when discussing the global economic outlook recently reminded me of the quote by Edward R Murrow "anyone not confused does not understand the situation" and I can understand why he feels this is a fair assessment of affairs.
It would appear that the old economic rules have been torn to shreds in the last few years. We have seen unprecedented levels of money being created (QE) in the US and UK, and surprisingly to a lot of people this has had no inflationary impact so far. The US has now ceased QE, which is something I said in a previous missive is actually a good sign, and the fears of Armageddon the market had when this was mooted last year have not come to pass. In fact the US economy and stockmarket is in a very healthy position.
Europe however is showing little sign of economic growth and indeed deflation is looking more likely. As a result the market expects that Mario Draghi will announce a period of QE this week. In Greece however we have an upcoming election that could result in the country leaving the Euro, which adds to the turmoil and could create ructions within the continent.
With the resounding victory in the snap election he recently called in Japan, Prime Minister Abe has been handed even greater authority to implement his reforms so there is little likelihood of a let up in QE in Japan anytime soon. The rest of Asia on the whole is in good shape and is also likely to be one of the main beneficiaries of the fall we have seen in the oil price.
In the UK I fear the upcoming election in May is likely to hang over the markets. The fact that no one can predict what Westminster will look like at the end of May means politics may well have an unwelcome impact on stockmarkets. If this is the case it could allow fund managers to take advantage of any dips in the short term; although it is an old adage that markets do not like uncertainty, it is also true.
So what we have is a world with the main economies at totally different stages of recovery; some heating up nicely, others cooling. Sailors will tell you that rounding the Cape of Good Hope where the cold waters of the Atlantic meet the warm Indian Ocean makes it one of the most difficult stretches of water on the globe to navigate. I feel this analogy is quite an apt description of the economic world at present and I would not be surprised if 2015 is a turbulent year for investors as a result.
However, although global markets may be volatile it does not mean they will be lower in twelve months' time. In fact I believe it is far more likely the majority will be higher. Investors still have little alternative to equities when it comes to looking for income and it would be no surprise if we saw a continued move out of bonds into equities. As well as this the US is likely to continue to grow economically and European exporters will benefit considerably from the weaker Euro. Consumers will also have more money in their pockets from reduced energy bills. So not all bad news.
However, if we do encounter some localised storms on the way, remember, as long as you batten down the hatches and don't turn round, calmer waters are likely to be on the horizon.