Investment environment very strong

At the beginning of last year and at the beginning of this year again, I would have been privately cautious, at least, about the outlook for equity markets, writes Jim Power.

After all, global equity markets have made stellar gains since the first quarter of 2009 despite enormous uncertainty and difficulties in the global economy and the global financial system over that period.

My caution was misplaced last year and so far this year it appears to have little justification. Markets are still simply surging ahead.

So far this year the US S&P 500 has gained 14.5% in euro terms; the FTSE 100 has gained 16.3%; the German DAX has gained 22.6%; the Nikkei is up 29.8%; the French CAC is up 22.2% and even the Iseq has gained almost 21%.

Indeed since the first quarter of 2009 — just six years ago — the US S&P 500 has gained 210%; the FTSE 100 has gained 101%; the German DAX has gained 228%; the Nikkei is up 185%; the French CAC is up 107%, and the Iseq has gained 229%.

These are incredible market gains and anybody holding those markets in a managed fund or in a pension is now sitting on very strong gains.

Having come so far so fast, there have been some concerns that the markets could be right for a reasonable correction, and despite many excuses for such a correction, including the ongoing Greek situation, market investors are not fazed and funds continue to flow into this asset class and currently the trend is very much one’s friend.

Investors have been driven by a belief that global policy makers would continue to do whatever it takes to get the global economy through its difficulties.

This belief has so far proved correct, with quantitative easing in Japan, the US and the UK, and now in the eurozone; official interest rates have been taken to rock-bottom levels; and most importantly the global economic cycle is improving slowly and corporate earnings are generally quite strong, notwithstanding the odd shocker like Tesco.

All of the aforementioned factors are continuing to direct investment flows into equity markets, but there is also a more fundamental point concerning where else to put money.

Official interest rates are close to zero virtually everywhere and 10-year bond yields in Germany are at 0.1% and they are not much higher elsewhere.

Not a lot of options if one is looking for any sort of returns, and so there is a strong flow of funds argument driving equity markets ever higher.

As I said earlier, I was somewhat cautious about equity markets in January, I remain so, but market trends continue to suggest otherwise.

Here in Ireland, believe it or not, property investment is very much back in vogue and commercial property in particular is very hot at the moment.

In 2014, there was direct real estate investment of €4.4bn here in Ireland and total commercial property returns of just over 40% were delivered in the Irish market.

Office and retail did very well, with industrial lagging somewhat.

To date, the Dublin market has experienced the bulk of the investment flows, but with scarcity of product and higher prices now a strong feature of the Dublin market, investors are starting to spread their wings gradually out of Dublin.

A key feature of the commercial property market last year was both the overseas and domestic interest.

There is clearly a strong belief amongst many investors that the Irish property market again represents very good value after such a calamitous collapse.

Property has come back into fashion in an environment of historically low short-term interest rates and bond yields, and following six years of very strong gains in equity markets, but the Irish investor has such a strong propensity for property, any excuse will do.

For investors in general, it is important to remain cautious and ensure that the investment portfolio is well diversified and not dependent on a single asset class as was the case for many people when the market collapsed in 2008.

Having said that, the investment environment is very good at the moment.