It is easy to be wise after the event, but given the ending of quantitative easing (QE) by the US Federal Reserve in 2014, and therefore no more extra dollars being ‘printed’, simple economic theory would predict the price of something that is no longer in excess of supply should rise.
And it has.
The dollar has strengthened partly on the expectation that interest rates will rise in the US. Current market expectations are for the Fed to raise rates in the second half of 2015, but there are divergent views about when (or even if) interest rates need to rise even on the Fed’s own voting committee.
Outside the US, the stronger dollar could have the greatest impact on emerging markets, where countries with pegged currencies could struggle from the loss of their exports’ competitiveness. Others with unpegged currencies who have borrowed in dollars may wish they hadn’t.
In contrast, the oil price has fallen precipitously since the middle of last year before finding a trading range of roughly $55-$60 in recent weeks. We say this play has many more acts to run: production in the US has not slowed down yet, rising to 9.3m barrels per day in February, 1m more per day than a year ago.
A quote from the Paris-based International Energy Agency’s latest Oil Market Report says it all: “Behind the façade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly.”
To date, QE has inflated asset prices and depressed currencies, so Europe and Japan could well continue to see similar results from their extensive easing programmes.
Both areas have factors that could boost these dynamics when compared to the operations undertaken by the US or the UK.
In Japan, the huge government pension investment fund has revised its asset mix, significantly increasing its target allocation to domestic-listed equities, which could translate into it owning around 2.3 per cent of the total market capitalisation of Japan.
In Europe, the European Central Bank is purchasing sovereign bonds with freshly printed money when interest rates and bond yields are already negative – this could significantly increase the pace at which investors move towards higher-risk assets.
From a UK-centric perspective the immediate focus will, of course, be on the election and the make-up of the next government.
But this is a pretty parochial issue in the grand scheme of things, so we don’t expect global equity markets to pay much heed to the result on the morning of May 8. Currency might be a different matter, but even if sterling were to weaken in the lead-up or aftermath of the election, we wouldn’t rule out a rebound later in the year.
In our view, when the key aim is the maintenance and increase of purchasing power over a significant period, well-chosen equities continue to be attractive.
We prefer fund managers who invest in businesses whose results are not overly influenced by the economic cycle. Tortoises rather than hares are our preferred animal and investment not speculation is what we endeavour to engage in.
John Chatfeild-Roberts is chief investment officer at Jupiter
