This Market Update comprises the following
Please read the following important information entitled "Should I make any changes to my investments?" before reading this Update -
Should I make any changes to my investments?
Everyone’s circumstances are different and we aren’t able to give you advice on what is appropriate for you. As always, if you are considering your own position, you should remember why you invested in the first place and consider the lifespan of your investments. Most importantly, you should seek financial advice before making any changes to your investments.
One way in which you can help reduce the impact of any market volatility is to spread your investments across different asset classes and regions. For more information about investing across different asset classes, take a look at our An introduction to diversification in multi-asset funds guide.
Remember that before making any changes to your investments, you should seek financial advice. If you don’t have a financial adviser, you can find one local to you by visiting find a financial adviser, which is responsible for promoting financial advice in the UK.
Investment markets and conditions can change rapidly and, as such, the views expressed in this Update should not be taken as statements of fact nor be relied on when making investment decisions. Forecasts are opinions only, can not be guaranteed and should not be relied on when making investment decisions.
April 2013 Update
Central banks’ policies help maintain upward momentum
Despite political gridlock in Italy and the financial troubles in Cyprus, the UK stock market rose for a tenth consecutive month in March. Helped by a 12% surge in index heavyweight Vodafone, the FTSE 100 index ended the month 0.8% higher, matching its longest ever monthly winning streak.
That share prices continued to rise despite the unpromising developments in southern Europe was testament to investors’ continuing faith in the power of monetary policymakers to lift asset prices. The US Federal Reserve (the US central bank) and Bank of Japan both remain committed to their respective quantitative easing programmes. The European Central Bank reserves the right to pursue “outright monetary transactions” (OMTs – i.e. unlimited bond purchases) should the need arise. And in the UK, a tweak to the language defining the Bank of England’s inflation remit fuelled speculation that Mark Carney, the Bank’s governor elect, may prove more aggressive in his pursuit of monetary easing than his predecessor.
Monetary policy easing is used by central banks to stimulate the economy by increasing the supply of money, and includes the process of quantitative easing where central banks buy assets such as corporate and government bonds. This has the effect of increasing their prices and pushing down their yields, thereby encouraging investors to switch into riskier assets such as stocks where it is hoped potential returns may be greater.
Yet the Footsie’s long winning streak was not solely a result of expectations for further “monetary activism” by central banks. Evidence of growth in the domestic economy remains elusive. But data from the United States – a key market for many UK-listed companies – is painting a convincing picture of an economy in recovery.
The gains were led by defensive areas of the market. Speculation that Vodafone might strike a deal to realise the value of its stake in US mobile network Verizon Wireless helped to lift the telecoms sector. Other defensive sectors, such as pharmaceuticals and beverages, also did well. With yields on government and corporate bonds remaining near record lows, investors are turning to dividend-paying shares in their quest for income.
On the other side of the coin, mining stocks performed very poorly amid news of budget overruns and weak commodity prices. Banks were also out of favour. The suggestion that the rescue deal agreed for Cyprus might provide a template for future bail-outs, with bank shareholders, bondholders and even uninsured depositors finding themselves obliged to contribute to the bail-out by taking a loss on their investments, failed to spark much enthusiasm for the sector.
Meanwhile, when uncertainty prevails, the urge towards a “flight to quality” (i.e. the movement of capital away from riskier to the safest possible investments) strengthens. In March, the primary source of that uncertainty was the prospect of financial meltdown in Cyprus. The combination of fresh concerns about Europe’s economic outlook and heightened sovereign debt worries helped fuel demand for the safety of “core” government bonds. Yields on ten-year German Bunds declined to a seven-month low of 1.28%. In the UK, appetite for Gilts was also boosted by a very weak manufacturing purchasing managers’ index (PMI). Expectations grew that the Bank of England will step in and provide more help in the form of a further bout of quantitative easing in the UK.
Review of 2012 and forecast for 2013
Global equity markets have made an excellent start to 2013. Indices have been at multi-year highs; money has moved away from the perceived safety of government bonds into equities; traders appear more upbeat than any time since the eurozone debt crisis erupted. What’s behind this rally? And can it last?
There’s no doubt that the world’s central bankers have played their part. None more so than Mario Draghi, the European Central Bank (ECB) president. His pledge to do “whatever it takes” to save the euro instilled some much-needed confidence into jittery markets last summer. This promise made it clear that the eurozone project was intractable and that Mr Draghi was willing and able to act should the need arise.
But he wasn’t alone. From the US Federal Reserve and Bank of England to the Bank of Japan and the People’s Bank of China, policymakers have been doing their utmost to support their respective economies. Interest rates are historically low, while huge swathes of money have been injected into the financial system in one way or another. With no end in sight to these extremely helpful policy moves, investors are becoming increasingly confident.
There are also signs that these measures are stimulating real growth in the world’s two largest economies – the US and China. The former’s all-important housing recovery is firmly on track and banks are lending once more. The US labour market continues to improve, while companies are increasingly moving overseas production operations back to the US. Should these trends continue, commentators expect to see solid growth in the US in the second half of 2013.
China, meanwhile, is showing signs that it is recovering from its recent wobble. There are indications that spending on infrastructure – roads, rail, municipal buildings, etc. – is invigorating the economy. A new government has also been installed and more credit is being made available to households and businesses. This is reflected in the recent rebound in the country’s property market.
The resurgence of these two nations will come as welcome relief to their numerous trading partners. Not least the UK and Europe, both of which are suffering from sluggish to declining growth. A bounce-back in the US and China should help make up for the lack of domestic demand. Exporters should also benefit.
The recent corporate earnings season has also been fairly encouraging. Many companies have delivered higher profits than analysts had forecast. A number of company outlook statements have also been more positive than they were last year. Further, numerous firms have been saving money throughout the crisis. This is money that they could start to spend once the economic picture improves. Such expenditure should in turn bolster the world’s economy, making for more sustainable growth.
Challenges, however, remain. Politicians, for one thing, could yet upset the apple cart. This has been particularly true in the US, where negotiations over the so-called “fiscal cliff” gave investors pause for thought at the end of 2012. The so-called "cliff" refers to a series of tax increases and spending cuts that were due to come into force from 1 January unless a budget deal could be agreed. These tax increases and spending cuts could have sent the US back into recession so there was widespread relief when a deal was finally reached, albeit just after the deadline. Then there is the “debt ceiling” which refers to the US’s $16.4 trillion statutory borrowing limit, set to be reached in May. If this ceiling isn’t raised, the government will be unable to meet its obligations and the next step, default on its borrowing, will be a real possibility. If this happens the fallout for the world’s financial system will be huge. While the subsequent debates will no doubt be fractious, many observers believe politicians in Washington will eventually strike a deal. No party, after all, wants to take the blame for derailing the economic recovery, no matter how entrenched their views.
Some commentators feel that there is a danger that complacency could see Europe’s leaders squander the valuable opportunity they have been given to lay firmer foundations for economic growth. The ECB may have bought time, but difficult and painful reforms still need to be carried out in many countries. Ireland has shown that economic changes are possible. It is starting to be rewarded by the market for this boldness; its trade deficit is down and foreign investment is up. This should hopefully encourage other countries in the eurozone to take action.
So, there are reasons for optimism. The eurozone crisis looks to have been contained for now. The green shoots of economic growth are starting to take root in many countries. The world’s central bankers have also shown their commitment to support markets. Traders, too, are starting to believe that the worst of the financial crisis could finally be behind us. But for all that, there remain many potential pitfalls ahead. Equity markets have had numerous false dawns since 2008. Nonetheless, if politicians and policymakers can steer a steady course through the coming months, 2013 could finally be the beginning of the end of the financial crisis.