After a strong start to 2013, markets have run into a period of marked volatility as the summer continues.  This has not been caused by any sudden decline in the outlook for company profitability – indeed, a gradual return to healthier economic conditions in the UK, and particularly in the world’s largest economy, the USA, appears to be gaining pace.  On the face of it therefore a sharp turn round in markets looks strange.

What has lead these developments are issues around the cost, and supply, of money.  While there is no hint among key central banks in the Western world that interest rate rises are at all likely in the short term, in the USA the chairman of the Federal Reserve has indicated that the ongoing programme of quantitative easing, (electronic money printing by a another name), may be subject to tapering, and possibly eventual cessation, if and when the US economy continues to recover.  In the UK, it is possible that quantitative easing may already have concluded, although the Bank of England’s new Governor will certainly be reviewing this.

The fact that the support provided by QE will eventually come to an end should of course be no surprise to financial markets.  However, the timing, and perhaps the language used, has spooked both fixed interest and equity markets and has probably been sufficient to have the effect of delaying QE’s eventual demise, by undermining confidence in a way that is most unlikely, in my view, to have been the intention of the remarks that were made.

Elsewhere, there is further evidence that the Chinese economy is likely to continue to slow.  In many ways I regard this as a sound trend as the helter-skelter pace of growth in recent years is, I believe, unsustainable.  Within the Eurozone, individual economies continue to develop in very different directions, while Japan continues with its reform programme, including substantial QE, leading to volatile, but on the whole positive, market movements.

In summary, I believe that equity markets in particular look increasingly attractive at lower levels, and investors for the medium and longer term should consider adding to their portfolios if the funds are available.  In the meantime, holding excess cash leaves depositors with negative real returns, a situation I feel is likely to continue for some time to come.