Market Update: Brooks Macdonald
We would like to share with you a market update from fund manager Brooks Macdonald, an integrated, wealth management group who have offices across the UK and Channel Islands.
The start of 2016 has seen a sharp return of volatility in most asset classes, with few areas of the market avoiding the general sell off that has characterised the first few weeks of the year. Investor sentiment has shifted to a far less positive outlook for 2016, with several commentators authoring very pessimistic articles.
We feel that the bulk of the selloff has been driven by concerns over the effects of the declines in oil prices and China’s economic situation against the backdrop of rising US interest rates. China’s two-speed economy continues to diverge, with industrial and manufacturing activity slowing due to the government’s efforts to reposition the economy towards consumption.
The movement from investment-led to service-based growth has caused issues within China and had knock-on effects around the world. For example, the fall in China’s rate of investment has decreased demand for resources and this has followed through into export-orientated emerging markets, particularly in Latin America.
The devaluation of the renminbi (official currency of the People's Republic of China) has also attracted headlines. However, China’s currency has appreciated strongly over the last few years as a result of having previously been pegged to the US dollar; we believe its recent devaluation should be looked at in this context, rather than in isolation.
It is also worth noting that in prior years, when the renminbi was appreciating, other major regions such as Europe and Japan were competitively devaluing their currencies. The recent devaluation brings the renminbi to a fairer level, in our view, but undoubtedly adds risk to global markets in the near term.
In December of last year, the US interest rate-rising cycle began, with the Federal Reserve increasing its base rate by 0.25%. At the time, the market seemed to be in agreement with this move and, ironically, would probably have taken a lack of tightening as a negative sign.
However, it appears many are now looking at this as a policy error, given January’s market movements. Recent comments from members of the Federal Open Market Committee suggest that the Fed’s guidance for four rate rises in 2016 may be reduced, given the global economic backdrop.
This should help reassure the market that the US will not tighten policy aggressively in the face of wider economic weakness. Comments from Governor Mark Carney have suggested that the Bank of England will also remain accommodative for quite some time. Overall, we expect the global economy to slowly improve as 2016 progresses, albeit in the face of higher volatility that we expect to be driven by US monetary policy, the Chinese economy and movements in oil prices.
Recent falls mean that we see value, selectively, in equities and still retain a preference for this asset class over and above fixed income. Despite this, we continue to hold allocations in both fixed income and alternative assets, although these holdings are primarily intended to provide balance to portfolios given our expectation of increased market volatility.
If you have any questions please contact the office so we can discuss your personal situation.
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