Quarter 1 has seen a continuation of the volatility we experienced in the second half of last year with Markets dropping in the middle of the quarter then recovering towards the end, while most equity markets also ended this period flat. The S&P 500 started the quarter at 2043 and ended at 2059 while the FTSE 100 started at 6242 and ended at 6174.
Oil experienced major volatility across the period, with prices for WTI dropping as low as $26.55 before recovering to levels of around $40 a barrel. Markets have been somewhat uplifted by a more dovish sentiment emanating from the US Federal Reserve with The Fed now predicting making just two interest-rate rises during 2016 instead of the previously reported four.
China continues to weigh heavily on the collective mind of all the global markets and for the present, the situation in China appears to have stabilised with the government easing back on its market interventions which were adding to the volatility. However the nation’s economy will continue to face strong headwinds for at least the next six months.
Looking ahead this quarter, many analysts are concerned about the potential decline in company earnings with this being particularly acute in the energy and commodity sectors, however cheaper prices are already starting to move on to other downstream sectors such as airlines and manufacturers which is positive.
Markets have now been down for ten months and it seems likely to us that most bad news is already priced in and we may start to see selected companies outperforming as earnings beat the low expectations already set.
Q2 will bring us the UK referendum on continued membership of the European Union with current polls too close to call, so we do expect to see some volatility in both the value of sterling and the FTSE 100.
Currently we expect to begin moving assets to cash across May with the view to trying to purchase back in, off the back of any resulting dip.
In the medium to longer term, we do not expect the result to have much of an impact, as it is probable that the EU and UK would rapidly negotiate a deal for continued membership of the common market. The UK is a massive net importer from the rest of the EU and the consequences of the UK being outside the single market would be quite devastating for the Netherlands, Germany, France and especially Ireland.
The bigger issue of a UK exit is likely to be in terms of the UK’s loss of free-trade agreements with other non-EU countries. However, given the UK’s status as the fifth-largest economy in the world – not to mention the fact that it is a net importer from most other countries – it would seem likely that some form of fudged deal would be reached to allow the UK to remain under EU treaties until new ones could be negotiated.
If a Brexit deal is reached we would expect governments to move quickly on such issues in order to stem any longer term uncertainty. So the Brexit vote is likely to pull the market down in the short term but will likely present us with a good opportunity in the medium to longer term.
The oil market has recovered on the assumption that the Russians and Saudis had a deal to at least freeze oil output at January levels, however the Russians have reneged on this deal by producing an additional 200,000 barrels a day in their March production figures.
The Russians have done this to The Saudis several times in the past – most notably in 2009 when they agreed to a production cut and then actually increased production. The other factor which caused oil to rally was the loss of production from Iraq and Nigeria which, due to closed pipelines, saw some 900,000 barrels a day removed from global production.
While many pundits are claiming the world is awash with oil, this is not really the case with The Saudis historically holding back a production reserve of around two million barrels a day. This in turn has then been used to make up any losses when other supplies falter, however The Saudis are now flooding the market with this reserve, which means there is little additional spare capacity.
The current low prices have caused major damage to the exploration industry and the IEA is now predicting a major oil shortage by the year 2020 which could once again send prices back above $100 a barrel.
We are currently waiting for prices to drop to a range of $32 – $34 a barrel before recommending any additional purchases within our portfolios as we still expect to see prices in the range of $50- $60 by the end of 2016.
I hope that you have enjoyed reading this post.
Kuala Lumpur : Malaysia