The first six months of 2014 have frequently been referred to as a period of consolidation, with many agreed that an economic recovery is underway in the majority of developed markets. Although the most recent figures, which show the US economy shrunk by 2.9 per cent in the first quarter, prove that any recovery remains weak and potentially fragile.
Meanwhile, the eurozone has so far avoided the threat of deflation, while the European elections only seemed to prove what many had expected – that the region has become more eurosceptic. Elsewhere, the Russia/Ukraine conflict has failed to make much of an impact on markets.
Further afield, Japanese prime minister Shinzo Abe’s reforms, dubbed ‘Abenomics’, have left investors slightly underwhelmed.
Asoka Wöhrmann, co-chief investment officer at Deutsche Asset & Wealth Management, refers to the current environment as a “Goldilocks economy”, as it is neither too hot nor too cold “so neither inflation nor recession poses a risk”. He suggests inflation will remain low in all the major economies for the rest of this year.
“The upswing is being led by the US, followed by Japan. The eurozone is still catching up,” he notes. “These differing stages of economic recovery will impact monetary policy, among other things.”
Central banks have been something of a focal point. This seems likely to continue as markets await action from Mario Draghi at the European Central Bank (ECB), who indicated in June that the ECB may move to expand monetary policy, and from Mark Carney at the Bank of England, who has been hinting about raising interest rates.
The US Federal Reserve cut its growth forecast at a meeting in June to between 2.1 per cent and 2.3 per cent but confirmed that growth in economic activity had rebounded in recent months. It also reduced the pace of its asset purchase programme by $10bn (£5.9bn) to $35bn a month.
Mr Wöhrmann adds that monetary policy divergence is likely to “intensify” in the future.
At an asset class level, the rotation out of bonds and into equities has hardly surprised. But it is exactly the lack of surprises heading into what is usually considered a summer lull that investors and markets are wary of.
In its latest update the Absolute Insight team from Insight Investment, which includes head of specialist equities Andy Cawker and head of credit Alex Veroude, cautions there are “reasons to be fearful”.
“Tapering by the US Federal Reserve against looser policy from the ECB is just the beginning… and markets are pricing a 50 per cent probability of an increase [in UK interest rates] as early as November. Those that remember 2007 will recall all too well that lightning can strike from a clear blue sky,” the team says.
Those who are invested for the long term will be positioned to ride out any near-term volatility in markets but how the remainder of 2014 will play out across asset classes and regions remains to be seen. Will it have a fairytale ending?
Ellie Duncan is deputy features editor at Investment Adviser