Smell of spring in the air

4 March 2016

During the first week of March, stock markets continued their recovery despite Chinese macro-economic data releases failing to impress and European updates being only marginally better than expected. The drivers were oil prices rising (!) back into the $35/b range and robust economic data for the US economy, (including very strong jobs report) clearly showing that this economy is currently not heading into recession. This insight may have also contributed to the mid-week turn in the bond markets, where long term bond yields finally followed the lead from the stock markets and cautiously rebounded from extremely low levels.

The initial bounce from the mid-Feb lows has, over the past 2 weeks, turned into a more pronounced market recovery, akin to that of October 2015 – which followed a similarly severe sell-off. Investors will therefore be relieved to read and see that most of the portfolio strategies we run across the different risk classes and investment styles are more or less back to where they started the year. That is not yet a positive result, but far more representative of an underlying Global economic development that has slowed slightly compared to the storming last quarter of 2015, but certainly not fallen off a cliff.

To be sure, we are not out of the woods yet. The markets were most probably wrong in pricing in a severe economic downturn in January and February, but the excessive media focus on all the things that might go wrong and undermine the economy did result in a negative feedback loop, which has not helped to improve the generally weak business sentiment towards investment and growth of their companies.

Furthermore, the strong US employment and decent economic data, increase once again the prospects of further rate rises by the US Fed in the near term, whereas the markets have currently not priced in the next move until the autumn. Rapid expectation adjustments have the propensity to disturb capital markets and it is therefore likely that 2016 market developments will continue to be characterised by the stop-start we have now seen since the last summer.

For the time being, however, we are pleased and somewhat amused with how the improving market valuations have also lead to an increased focus on everything and everybody who is willing to say “actually things are not so bad” – refreshing after all the doom and gloom talk in the first 2 months.

Monthly global asset class returns for February

Reurns Feb16                 
It is this counterbalancing quality of government bonds which makes them such valuable ‘risk dampeners’ for risk targeted portfolios, even when they are already at historically very high valuation levels. Their large proportion of overall investments in the lower risk portfolios are the reason why the top two lines in the chart at the beginning never dipped that much into the negative, as they experienced much more stable values during the recent correction than many clients had expected.As at the beginning of every month, above the table with the asset class returns of February, 2016 Year to Date and 2015 as a whole. Overall a fairly flat-ish month, because the market lows only occurred in the middle of the month. What sticks out on the positive return side are bonds and gold. Both save heaven assets which almost always rise when fear levels increase.