Hello and welcome to Living Money’s Manifesto for Monday 5 October 2015.
I am Jeremy Deedes, financial life planner with over 25 years experience in financial services, author of Right Money, Right Place, Right Time and founder of Living Money.
Summary – Yucky quarter
There is no point in beating about the bush. Its been a bad quarter for investors. Everything is down. In fact, there are very few stock markets showing a positive return year to date.
Perhaps I should rephrase my first sentence. Its been a bad quarter for short term investors. For longer term investors, life has been good. Take the US S&P 500, for instance. Even after recent falls, the market is up 67% over the last five years, with dividend income on top of that. In fact, the annualised total return on the index over 5 years is 11.8% pa. Admittedly, its been a very good five years, exceeding the very long term average total return of just over 8% pa (and 11% with dividends reinvested).
This is simply to make the point, that investment planning ads more value to portfolio than investment management. Your portfolio, as a private investor, is there fro a purpose – to support you in your life’s journey, to help you achieve those important personal projects and ambitions, so work out your cash flow, and if you need to draw down from the portfolio in the short term, in under three years, don’t invest it in the stock market. However, money you can afford to put away for the longer term, 7 years plus, should definitely go into the stock market because its going to grow in real terms, protect your investments from the insidious threat of inflation and ensure your longer term financial security.
If we look at the various parts of the global economy we can see why this is the case
US – still a reasonably benign picture
• Yes, payroll data released on Friday did disappoint, but payrolls are still growing. Losses seem to have occurred in the export sector, which is still suffering from the strong dollar and slowing global growth, although this was partly offset by an increase in Government hirings
• On the home front, however, things look rosy, with unemployment at a very low 5%, and consumer confidence reviving after the July dip and strengthening into the holiday season, which will be good for domestic manufacturing and retail
• Equity investors treated the bad news in Friday’s payroll data as good news because they saw it as postponing the lift-off in interest rates at least to December, possibly into 2016.
• However, many investors did treat bad news as bad news. Money flooded into the treasury market during the last week of the quarter, pushing rates right back down. It seems some investors see the potential for slowing global growth to have an impact on the US domestic economy as well as the export sector, and are returning to the safe haven of US Treasuries
Europe and UK – moving forward
• Its still steady as she goes in Europe, helped by the ECBs QE programme. The PMI is still positive at 52, albeit down a little on the previous month. Manufacturing output rose for the 27th consecutive month, reflecting further new business growth and an increase in export orders on the back of the weak Euro.
• Importantly, job creation increased for the 13th consecutive month, helping to reduce the immense social pressures from a double digit unemployment rate in the region
• Inflation remains low, helped by low oil prices
• With a US rate rise again moving further into the future, there is a feeling that the ECB may announce further stimulus measures when it meets again this Thursday.
• In the UK 2nd quarter GDP growth was confirmed at 0.7%, and we should keep an eye on the Conservative Party conference for any announcements on stimulating the economy from the Chancellor
• After holding up well compared to other Far Eastern indices, Japan finally took a tumble as news came through that the economy contracted in the second quarter and has probably contracted further in the third.
• In Japan, business sentiment is down, as is industrial production. Manufacturing still remains in expansion territory, although the rate of growth is falling.
• However, the consumer remains reasonably bright and happy to increase household spending
• In China, the manufacturing sector continues to contract. Growth has been the victim of a huge fall in housing construction, leading to surpluses in steel and cement and mothballing of housing sector related plants.
• Lacklustre export demand has also hit China, as has the general malaise in the larger emerging markets.
Markets in third quarter
Japan -14% (Topix)
FE -18% (MSCI Asia)
Euro -11% (S&P Europe 350)
UK FTSE 250 -6%
UK FTSE100 -8%
US -8% (S&P 500)
Oil -21% to $45
Gold -5% at $1,132 (after rising to $1,159 by 21 August)
The US is the worlds largest economy, and the US consumer is by far the largest part of that economy. At the moment, it is benefiting from low interest rates, cheap energy, rising employment, low inflation and a confident consumer.
The US debt overhang has been substantially eroded, the Government is relaxing its budget squeeze and US households look set fair to drive growth in the US. That will support economies in other parts of the world, especially Japan and Emerging Asia.
Yes, interest rates in the US will rise, but that will not have a significant impact on household expenditure as mortgages are mostly fixed.
With China, the worlds second largest economy, in the doldrums, the news from the US is good and likely to support both the US markets and global markets through 2016.
About Living Money
Living Money coaches busy families in personal finance. We are not authorised to provide financial advice and we do not recommend financial products. Instead, we aim to provide you with the tools and skills to buy the financial products that will best serve your life and money.
Thats it from me. Thank you for listening. Have a very good week.
Take care and go well.