With summer over, it’s a good time to take stock of what has happened so far this year and the likely direction of travel.
We have seen some events that were relatively easy to predict and others that took us all by surprise. Some markets and asset classes have exceeded our expectations, while grey clouds hang over others.
The UK stockmarket has performed a little disappointingly considering the ongoing improvement in the economy and the easing of political risk after the conclusive result of May’s general election. This year the FTSE 100 index retreated from its all-time high as a strong pound took the shine off earnings for exporting companies. By the same token, more domestically focused smaller firms have performed well.
Looking ahead, the UK market should draw strength from the recovery of the eurozone. Nonetheless, uncertainty remains as conversations are now turning towards the likelihood of a Brexit.
Across the Atlantic, the US stockmarket appears to be in a phase of consolidation following its impressive performance over the past five years. Recent corporate earnings have not been strong enough to justify relatively rich valuations, and earnings are unlikely to bring too much cheer in the near future as the dollar is expected to strengthen and weigh down overseas revenues. The economy has performed somewhat unconvincingly since the turn of the year, and it remains clouded by unknowns in monetary policy and political uncertainty as the country enters a presidential election year. There are, however, some signs of optimism with the engine of US growth – the domestic consumer – gaining confidence as the jobs market continues its steady improvement and wages rise.
With the eurozone having been shaken to its core by the Greek debt crisis, European equity markets have at times been on the back foot this year. Yet despite the fallout from Greece’s problems, shares have benefited from hefty central bank support. Quantitative easing is running at full tilt and there is no talk yet of interest rates having to be raised. European companies are generally in good financial shape and, with the euro having weakened, they are becoming attractive bid targets for foreign buyers.
Performance from Japan has generally been encouraging and, although there was a pause in the second quarter, government support to boost growth and inflation remains firmly in place.
Elsewhere, Asian economies have generally struggled as weakening currencies have increased the burden of their external debt. However, Asian markets will continue to benefit from the ongoing downshift in commodity prices as the regions’ economies are heavy consumers of imported energy and raw materials. But the major exporters such as Russia and Latin America will suffer further stress on their balance sheets as earnings fall once again.
There have been a number of surprises already this year and making sure a portfolio can cope with any future anomalies, while still generating an attractive return, requires thorough due diligence. Get it right though and you’ll have plenty of reason to feel jolly come Christmas time.
Rob Burdett, co-head of multi-manager, BMO Global Asset Management
