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2016 Markets Overview

It is probably an understatement to suggest that global stock markets have experienced turbulent conditions in 2016. The year began with serious concerns about the potential for several interest rate increases in the USA. However, US economic data was unexpectedly weak in the first quarter, fuelling fears of recession. Serious weakness in the oil price during January and February also unsettled markets, with Brent falling to around $29 per barrel.  At this juncture international equity market moves were closely correlated with the oil price, so prompting a nervous couple of months, which the Bank of Japan’s unexpected policy announcement of a move to negative interest rates did nothing to dispel.

The strength of the subsequent recovery in the oil price was perhaps surprising, with Brent rallying to the $40 - $50 range. It was helped by a combination of stronger economic activity in the USA, signs of the economic stimulus supporting the Chinese economic growth at around 6.7% and by some oil supply disruptions. Signs that OPEC may reach formal agreement to limit oil production at their November meeting boosted the price to over $53 in early October.     

The UK’s vote in June to leave the European Union initially led to a sharp fall in the domestic equity market, pronounced weakness in sterling and a very strong rally in the gilt market. On further consideration, with investors mindful of the circa 70% overseas sales exposure of the FTSE 100 Index, sentiment towards companies with a high international involvement ( especially in US dollar terms ), turned sharply positive. The Mid Cap Index, which is more exposed to the domestic economy, lagged.  Overall, sentiment towards UK Equities was assisted by the Bank of England cutting interest rates to 0.25% and introduction of other stimulus measures coupled with the swift announcement of a new Prime Minister. The overseas bid for the specialist semiconductor company ARM was also seen as a vindication of the UK’s economy post Brexit.   

In the UK, the key medium and longer term concerns focus on uncertainty regarding the plans for the UK’s departure from the EU, possible transition arrangements and future trade negotiations with other countries. The short term outlook is clouded by the recent legal ruling that Parliament must be involved in the process of triggering Article 50. In the background the high level of debt within China has been highlighted by the IMF as an issue affecting the stability of the global economy.

Global markets are currently reflecting on the consequences of Mr Trump’s surprise US Presidential victory. A considerable degree of uncertainty exists regarding his likely economic policies, but there are implications for immigration, trade tariffs, government spending plans, healthcare reforms and inflation. In terms of international relations overall, a rather more isolationist and protectionist approach is implied. In the immediate aftermath of the election result, markets were volatile as investors assessed likely policy changes and Mr Trump’s pro- business intentions.    

It should be highlighted that stock markets tend to climb a “wall of worry” and the current bull market is no exception. However, the structural background is worth highlighting : The populations of western developed countries are ageing, sovereign bond yields are very low ( in some cases negative ) and interest rates remain exceptionally low so that the income attraction of investing in equities is very strong. In addition, equities tend to benefit from some modest levels of inflation. In summary, while the year ahead for global stockmarkets is likely to remain volatile, the 3.6% All Share net yield, for example, has genuine appeal.                                                             

Disclaimer:The information provided does not constitute investment advice or recommendations. Whilst we have taken all reasonable care to ensure that the information contained within this publication is  accurate, current and complies with relevant UK legislation and regulations as at the date of issue, errors and omissions may occur due to circumstances outside our control. Please note that past performance is not a guide to future performance and that the value of investments, and the income derived from them, may fall as well as well as rise and investors may not get back the full amount originally invested. Everys is authorised and regulated by the Financial Conduct Authority in respect of financial services No 120379.       

10th November 2016    

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