Chasing value in markets not any easier
Compared to the fears that were widespread at the start of the year on geo-political issues, the actual outturns so far are reasonably benign. Brexit and the UK general election are making plenty of headlines but the impact on money markets has been limited. Sterling bought you €1.17 on January 1 this year and yesterday was trading at €1.18. The FTSE 100 commenced the year at 7,145 and is now at 7,300.
At a broader level, the VIX, which measures implied volatility on the S+P 500, is at its lowest level since 1993. The outcome of the earlier Dutch election, last weekend’s French election, and growing popularity for German leader Angela Merkel are all calming nerves.
At home, the company reporting season went largely as expected. Dividend decisions were in line with analyst expectations so investors have enjoyed another stream of income when interest rates are very low.
Against this background, investors must plot their way carefully. While markets are quiet, some very important voices continue to warn about the effects of QE. At its most visible level, this is apparent in deposit rates that are close to zero. Historically, these rates are almost unprecedented but we risk being complacent about them because QE has been active for over seven years.
Record low interest rates have pushed enormous amounts of money into other asset classes and that is pushing up prices in everything from bonds to property and equities. If you model interest rates close to zero, it is not hard to justify high valuations for a range of assets so prices, in absolute terms, are elevated.
Wealth managers constantly try to balance the pursuit of positive inflation-beating returns with the risks of an external shock that undermines capital values. Individuals need to think the same way. Building a mix of assets that can inject targeted returns is essential. Right now, this challenge is as difficult as I’ve seen in many years despite the calmness of markets.
Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.
