Equities Rally but the Outlook is No Less Complex

Jeff Keen reviews the recent rally in equities

Last month we wrote about the gloomy start to equity markets in the first few trading sessions of 2016, ranking right up there with the worst periods over the last 80 years.  So it might surprise to hear that in early March the US equity market is again close to a new high, albeit in total return terms for Sterling investors. 

Source: Thomson Datastream – data to 04.03.16

Clearly, Sterling has been a weak currency of late which flatters the performance of overseas assets, but given the widespread fears of a US recession which were being openly discussed in the market just a few weeks ago, the rally in the equity markets reminds us of the risk of being out of the market as well as the risk of being in it.

The other surprising fact this year is that the FTSE Emerging Market index has performed ahead of all of the major Developed markets with a positive 4% return.  No doubt the rally in the Oil price has been a major factor here in combination with uncertainty surrounding the pace of interest rate hikes in the US which has led to a pause in the US Dollar rally.

We remain cautious on equities for the time being while earnings forecasts continue to be trimmed.  It remains unclear whether this is due to a widespread deterioration in company fortunes or just a more cautious approach by analysts.  Time will tell.

All of this together with uncertainty in the UK around the Brexit vote, means that investors are faced with a complex outlook for financial markets.  During such periods it makes sense that excessive risks should be reduced and investors should be patient until the outlook is clearer.  Some hoarding of cash in the short term may protect capital as well as investors’ nerves.

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