Market Commentary – January 2014
The last month of 2013 turned out to be positive for developed market equities after some profit taking before the last Federal Reserve meeting. The event of the month that also affected both equities and fixed income was the Federal Reserve’s decision to start the tapering process in January after the US budget negotiations came to a favourable resolution. Once the tapering decision was made public, equity indices moved higher and reached new 2013 highs, with some indices making new all time highs and closing the month on an optimistic note. Yields on developed government bonds moved higher with UK and US 10 years yield trading above 3% as the Federal Reserve took steps towards a more normalised monetary policy.
In the UK the OBR’s forecast, contained in the annual autumn budget update to parliament suggested that UK growth would reach 1.4% in 2013 up from 0.6% predicted back in March and in 2014 a 2.4% rise. These updates backed by improving macroeconomic readings coming from manufacturing and construction sectors pushed equity indices higher, whilst speculation about an increase in interest rates sooner than expected moved UK 10 year Gilts above 3%.
In continental Europe, finance ministers continued to make progress in reaching an agreement on a Single Resolutions Mechanism (SRM) and Single Resolution Fund (SRF) that will form the core of the banking union. In the same period Ireland became officially the first European Country to leave its bailout program. The economic readings coming both from developed as well as peripheral countries continued to surprise on the upside which fuelled market optimism.
In the US the first half of the month was marked by speculation surrounding the FED tapering decision and negotiation around the US budget. Once the US budget was voted, the Federal Reserve announced that a first tapering round of $10 billion would be implemented in January 2014. The decision was saluted by the equity spectrum which recovered from the beginning of the month modest decline and continued the positive trend for the rest of the month with the S&P 500 closing on a new all time high. The yield on 10 year US government bonds climbed above the 3% threshold and will probably continue the upside trend for the foreseeable future as the tapering process unfolds.
It was another positive month for Japanese equities with Topix gaining another 3.5% whilst Nikkei 225 closed above 16,000 for the first time since 2007 and had the biggest yearly advanced in more than 4 decades. The 2013 economic reforms launched by the Abe Government and the loose monetary policy have been the main drivers of Japanese equity performance.
Emerging Markets Summary
It was another month of underperformance coming from emerging markets as FED tapering speculations and in the end inception generated a higher level of volatility, the Chinese financial system was under intense pressure as the seven day repurchase rate spiked 140 basis points to 6.6% and forcing the People’s Bank of China to supply $32.9 billion of short term funds. Going forward, as the tapering process is implemented we expect elevated levels of volatility to characterise the EM space with inferior risk adjusted returns compared to developed equities.