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What Can Investors Learn From Current Market Trends?

01. April 2015

If you’re parsing how to benefit from lower oil prices and play global currencies, remember that cheaper energy and a stronger US dollar are good for the world, but not everyone in it.

Less expensive oil prices help consumers to spend, stimulating the economy. Meanwhile, the stronger USD dollar helps global growth, even if it comes with short-term downsides for US stock market and corporate earnings.

Remember that different companies will be affected differently and position your holdings selectively.

Winners in the medium term are likely to include consumer discretionary companies benefitting from resurgent spending and the US consumer. Losers are countries who are large net oil exporters or have high foreign account deficits, leaving them vulnerable to currency fluctuations.

What to do about interest rate risk

Perhaps the single largest macro question for investors this year is when will the US Federal Reserve raise interest rates ? Consensus is for an initial increase this summer or autumn, but the Fed remains insistently data dependent.

Whatever and whenever it happens, investors need to remember that overall policy will remain very loose.

And as monetary policy tightening gets underway in the US, the ECB is stepping up to the plate to buy bonds (expected to accounting for 45% of net issuance) to push down yields and push up prices.

The message for investors is don’t fight central banks.

Opportunities in emerging markets and europe

If you’re going to fish in emerging markets, it’s time to be even more careful. Selectivity will be the name of the game. Most of the world’s GDP benefits from falling oil, but it will not be as simple as going down a list of oil importers and exporters due to the currency overlay affects.

Across the pond, the positives are adding up for Europe, it may be time for investors to consider adding exposure.

In absolute terms, earnings are still not massively strong, but are up on a relative basis compared to the very poor figures we were seeing a year ago. Analyst expectations are being revised up for the first time in four years and the numbers have been reasonably encouraging, partly because of the weaker Euro. This bodes well for equities.

Weighing the outlook for equities and bonds

Equities look better value than bonds, but they are no longer cheap. With corporate bond yields currently so much lower than equity dividend yields, consider balanced exposure to equities as a source of income.

The long end of the bond market looks well supported but a lot more expensive than equities.

Continued demand from non-economic buyers like central banks may continue to prop up valuations.

While bond yields are incredibly low relative to history, the weight of investible assets chasing a safe return, low inflation as far as the eye can see and ongoing geopolitical tensions could well lead to further declines.

Some bond exposure is warranted as part of a balanced portfolio but diversification within fixed income will continue to be key.

The impact for investors

We all know that a properly balanced portfolio can provide better returns with less risk, but the market surprises of 2014 illustrated this in brutal clarity.

Despite the almost overwhelming expectations of market watchers, bonds surprised investors by rallying. After having returned just 0.1% in 2013, government bonds generated over 8% in 2014. If you’d been diversified, holding a balanced mix of shares and equities in your portfolio, you’d have total returns of approximately 7% last year, instead of missing the boat entirely.

In addition to this, trying to time the market is a really bad idea. Market lows often result in emotional decision making. If we look at returns on the S+P 500 Index from the last 20 years, six of the 10 best days in the stock market occurred within two weeks of the worst 10 days in the markets.

If you flee from the markets on the fear of further declines, you risk crystallising your losses and paying the price in your long-term savings goals.

Volatility continues to dominate headlines, but it’s a fact of life in financial markets.

In 2014, the Stoxx 600 had 34 days where there was more than a 1% positive or negative movement on the index. The average going back to 1990 is 67 days.

Investors should consider looking through short-term market swings and stay invested to benefit from the uptrend in corporate earnings we are expecting to see on both sides of the Atlantic.

Don’t be spooked by volatility and be realistic about your return expectations.

Source : Stephanie Flanders - Chief Strategist JP Morgan Asset Management

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