Half Time Team Talk

In football parlance, for investors we have just come out for the second half. So what is the half time assessment of stockmarkets in 2014? My brief comments are based on my own observations and those of Neptune Investment Management, M&G and Neil Woodford, formerly of Invesco Perpetual and manager of the newly launched Woodford Equity Income fund.

Equity Market Overview

According to Neptune developed equity markets have been in stop start mode in 2014 with returns flat up to April but then a return to the bull market in the second quarter. Weather related factors in the USA were a temporary headwind to economic growth in the first quarter as were deflation fears in the EuroZone. The ECB* have taken action in loosening monetary policy with potential money printing or QE to follow. The second quarter rally has driven US and German stockmarkets to new highs.

Unexpected Bond Rally

M&G observed a surprising feature of the first half of the year was the rally in fixed interest, notably government debt. Prices have risen and yields have fallen even in Spanish and Italian bonds. This was unexpected given tapering of QE in the USA and the likelihood of higher interest rates notably in the UK. The predicted great rotation from fixed interest (or bonds) to equities is still to happen on a significant scale although it should be noted that institutions such as pension funds that need to match financial obligations at different dates will continue to be long term holders of bonds as will income investors.

Other Assets

Commercial property is a sector which is highly economically sensitive and returns are gathering pace although unlike residential property they are predominantly from rental yields rather than capital values. Gold has continued to tread water at just over $1,300 an ounce, although a recent theme is that central banks are net buyers of gold rather than sellers.


In the UK Neptune noted there was a shift in the equity market with investors moving away from the winners in 2013 to the laggards. For example there was a sell off in mid-caps in the Spring with undervalued UK large companies and mega-caps back in favour. At a sector level there was pressure on house-builders, building merchants and retailers with a move into energy and materials. Incidentally this accords with improved investor sentiment to miners and commodity companies globally which have fared badly in recent years.


In the US the economy contracted by 2.9% in the first quarter, much of this was weather related. Despite this the S&P 500 index has continued to rise illustrating that economic growth and stockmarket performance may be negatively correlated. M&A activity has picked up and this may be a factor here.


In Japan the stock market rally has lost steam. One factor was the increase in VAT from 5% to 8% in April which is expected to dampen consumer spending although wage growth was positive, land prices are rising and corporate earnings have strengthened.


The spectre of deflation has been a concern although as Neptune observe, “the ECB’s thorough stress test of banks is a landmark moment for the Euro area. Following the results, strong banks will be able to lend freely into the economy.”

To close I was interested to hear Neil Woodford’s view on the market as it strongly backed the assessment from Apollo Multi-Asset Management which I covered in a blog dated 8/3/14, “Beta Jockey’s to Fall at the First Hurdle,” see

http://www.montgomuse.co.uk/beta-jockeys-to-fall-at-the-first-hurdle/ .

In Woodford’s article he argues stock-picking is back in favour. He observes in the last five years with extraordinary monetary policy it has been difficult to beat the market. This is because QE has raised asset prices indiscriminately, like a rising tide lifting all boats. Evidence comes from data of global stock market correlations since 1990 which have been significantly higher than average especially between 2009 and 2012. In recent months correlations have fallen and Woodford believes that stock price movements will return to being determined by fundamentals, such as cashflows, balance sheet strength and good management. In this scenario good stock-pickers will do well.


Time and space does not permit full coverage of the global economy and stockmarkets. Moreover there have been country specific factors, for example the Russian market sold off with the Ukraine crisis whilst sentiment to India has improved with a new reformist government.

My assessment is systemic risk to the global economy and financial system does not feel as bad as in 2008 with the banking collapse or in 2011 with the EuroZone crisis. Although high equity valuations in some markets invariably will result in profit taking and corrections, the global economy is in recovery mode, albeit a patchy one. Overall it looks good for equities which remain my favoured asset class although investors will need to be selective, considering undervalued sectors and markets for example large UK companies and emerging markets. In the bond market I favour flexible strategic bond funds that can invest across the range of fixed interest assets and inflation linked bonds.

*The ECB is the European Central Bank

This blog reflects my own views not necessarily those of Neptune Investment Management, M&G Investments, Apollo Multi-Asset Management or Woodford Investment Management. It is intended as general investment commentary and is not an invitation to invest or not invest in the areas mentioned. You should seek individual advice before making investment decisions.