Depending on which side of the Atlantic you are on, you will have a very different view of the investment landscape.
Over in the US, Joe Public must be pretty happy with his domestic equity holdings as the S&P 500 has returned 8.3 per cent (in local currency terms with dividends included) over the first three quarters of the year. However, back here in Blighty, Mrs Miggins has not fared so well as the FTSE 100 has eked out a meagre 1.0 per cent so far this year. In fact, even though returns have varied regionally this year, the last quarter was pretty dire in most places.
Much of the poor performance in global equity market over the past three months could be attributed to concerns about a slowdown in global growth. The IMF’s forecasts released last week showed that it had downgraded its estimates for global growth by 0.4 percentage points and now expects the global economy to expand by 3.3 per cent this year. Many regions of the world have lost momentum over the summer months, but on the whole, the global economy is still recovering. This should be a positive for continuing to hold equities. However, that recovery is increasingly looking uneven and quite ugly.
Market sentiment in the US continues to be driven by debate over the timing of the first interest rate rise, reflected in a strengthening US dollar and rising Treasury yields. In the US, the gap between robust growth data and a booming job market seems to be widening. Second-quarter economic growth was confirmed at 4.6 per cent quarter-on-quarter on an annualised basis, but some of this was a rebound from the first quarter’s dismal figures.
The labour market continues to tighten, adding just over 225,000 jobs per month since January and the unemployment rate has fallen to 5.9 per cent, below its 50-year average. However, even with a tightening labour market, there is still little sign of wage growth.
The US economy is one of the strongest globally, but the strengthening of the US dollar could present a risk to this outlook. On a trade-weighted basis, the greenback has gained nearly 5 per cent since the middle of year. The stronger US dollar is a signal of confidence in the economy, and should benefit consumers as it caps energy costs. But it is also a source of disinflationary pressure, and could weigh on the equity markets if it cuts into foreign earnings, leading to lower confidence and consumer spending. In addition, by importing deflation, the US Federal Reserve may delay the start of the rate rise cycle.
Energy costs are already falling due to a surge in shale oil output and the WTI oil price fell by nearly 14 per cent over the quarter. However, markets are yet to change the current expectation of rate rises beginning in the middle of next year, as the strengthening currency is not yet enough to create a significant headwind to economic growth.
Compare this to the eurozone. Ever since European Central Bank president Mario Draghi’s Jackson Hole speech, expectations were running high for further stimulus measures. The ECB delivered by pushing bank deposit rates further into negative territory and announcing a bond purchase scheme, but not outright quantitative easing. In the end, the ECB underwhelmed by failing to state a targeted size for the stimulus. However, the pipeline of stimulus measures - including targeted long-term refinancing operations, a covered bond programme and the purchase of asset-backed securities - is substantial. This shows the ECB’s determination to support economic recovery and tackle the weak inflationary environment.
Furthermore, while the eurozone’s economic recovery is weak and extremely fragile, there are some high notes as consumer spending picked up modestly in the second quarter. Retail sales have recovered from July’s weak start to the quarter, car registrations trended higher through August and consumer confidence indicators only fell back to the long-run average in September.
The pace of structural reform has been slow, especially in France and Italy, and this may limit the impact of additional stimulus measures from the ECB. While Mr Draghi can change monetary policy to increase the supply of credit, any improvement in demand must come from country-level reforms. Without this, the ECB is likely to continue to resist a full programme of QE.
This divergence in economic growth will soon translate into a divergence in monetary policy by major central banks and I expect this to create bouts of volatility in both bond and equity markets. The trouble is that the timing of policy rate rises is still up for debate, even among the policymakers themselves.
Kerry Craig is global market strategist of JP Morgan Asset Management
