Factors behind the recovery include the onset of the third quarter earnings season when many companies provide guidance on their earnings covering the summer months. In turn, when taken together with half yearly figures announced in the summer, these produce a good picture of the likely outcome for the year as a whole. This year, the earnings season has been mixed, with a majority of companies exceeding analyst’s expectations but there have also been some disappointments. For example, companies exporting into the Chinese luxury goods market are facing a slow down while some companies in the commodities sectors have somewhat exceeded expectations that were low as a consequence of falling commodity prices. In the UK, companies outside the FTSE 100 Index have in many cases performed better in actual terms given the former’s heavy dependence on the commodity sector.
Monetary policy has also been a key influence. In the US, the Federal Reserve notably did not raise interest rates in September or October (this had been widely expected earlier in the year), not so much as a consequence of any great slow-down in the US economy to date, but rather because of the possible impact of global events (in particular the possibility of a further slow-down in China and emerging markets) which may impact in the future on US economic growth and the possibility of deflation. At present, the timing of the first US interest rate increase, itself likely to be modest, is a matter of conjecture and it remains very likely that the timetable for any UK interest rate increase has slipped well into next year.
In addition to these factors, there appears to be the prospect of further monetary loosening, very likely to be in the form of quantitative easing in Europe, in addition to the ongoing process in Japan, while elsewhere, China has again recently reduced interest rates in order to stimulate economic activity. In essence, the prospect of continuing lower interest rates in developed economies generally, and of further monetary easing provide comfort for fixed interest investors. This also underpins equity values which remain at around long term cyclically adjusted levels – suggesting that, in general, they’re not overpriced.
Readers of our Newsletters will have noted that, as a general asset allocation policy, we favour relatively higher equity weightings within portfolios where income requirements allow: our belief is that, currently, this now established trend should remain in place for the moment.