January ? An Encouraging Start To The Year


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January was a very positive month for the major equity markets as they enjoyed a strong start to 2012. The FTSE 100 index posted its best mont

January was a very positive month for the major equity markets as they enjoyed a strong start to 2012.

The FTSE 100 index posted its best monthly performance since October, helped by strong corporate results, higher oil prices and improved risk appetite. European shares had reached a 6-month high by 1st February.

Over in the US, the Dow Jones Industrial Average and S&P 500 indices recorded their best start to the year since 1997. The Dow Jones had its largest January point jump on record. The Nasdaq Composite also had its best January since 2001.

The star performer in January, however, was emerging markets. The MSCI Emerging Markets index posted a gain of 11% (in US Dollar terms), which was the best start to a year since 2001 for this region.

Change in sentiment?

An interesting indicator of investor sentiment is fund flow data, which shows the direction of investor money and the destination. EPFR Global, which provides fund flows and asset allocation data to financial institutions around the world, reported that January 2012 saw inflows into emerging market funds reach levels not seen since the second quarter of 2011.

It was also reported that high yield bond funds recorded strong inflows and inflows to European bond funds stood at seven consecutive weeks.

Reflecting the general increase in risk appetite, financial sector funds recorded their biggest weekly inflow (for week ending 25th January 2012) since the fourth quarter of 2010 and redemptions by retail investors from equity funds fell to the lowest level in over six months.

Fears surrounding Italy or Spain being dragged down by the Eurozone crisis also subsided. The difference ? ?spread? – between the yield on Italian, Spanish and French government bonds relative to the very stable German government bonds has declined over recent months. This is particularly true with regard to Spanish and Italian bonds. The risk associated with holding these bonds has decreased and this increase in sentiment has been reflected in the strong equity market performance in January 2012.

What has driven this change in investor sentiment?

For a start, decisive policy decisions by central banks around the globe have definitely helped improve sentiment. The decision the European Central Bank (ECB) took in December 2011, to make available ultra-cheap 3 year loans to European banks, injecting ?489 billion into the Eurozone banking system, which helped boost liquidity and remove some of the financial risks in the region.

In the US, the Federal Reserve Bank (Fed) has adopted a very transparent stance and recently announcing an extension to their ?lower for longer? interest rate policy.

Looking at emerging markets, over January we saw a variety of policy measures aimed at maintaining demand and growth. These steps included interest rate cuts in a host of countries including Brazil, Chile, Indonesia, Taiwan and Thailand. India and China also reduced their reserve ratio requirements. This is the amount of deposits that banks must set aside, so a decrease in this amount means that banks are able to lend more and therefore increase growth prospects within the economy.

There have been concerns that emerging markets might head for a ?hard landing?, but this now does not seem to be the case. Their economies in general are slowing, but not as sharply as some had feared.

Further encouragement came from the increasingly better performance of the US economy in recent months; which reaffirmed the fact that the US is a long way from entering a recession.

Here in Europe the economic data was less bad than feared, with better data from Germany in particular.

So while there has not been an abundance of good news, overall the bad news has not been as bad as feared last autumn. Risks within Europe do of course still exist, as do challenges to growth, but the positive news is that Europe is not falling apart at the seams as was predicted by some late last year.

Where next?

It is too early to know whether markets have put all the fears of last year behind them and are ready to surge forward, or if this was a temporary rally. Until there a more definite resolution to the Eurozone crisis we can expect some more volatility and sideways trading.

Having said this, let?s not forget that markets are forward looking and have the ability to rebound strongly once a bottom has been hit. For example, major equity markets rallied over 40% in the 12 months following the post-Lehman?s low in 2009.

If the momentum we saw in January continues to drive shares higher, then more and more investors will be encouraged to move back into equities. There is a lot of money sitting in cash waiting to be invested, and with interest rates so low the money will be invested at some point, we just do not know when.

Is this a good time to invest? Yes, but then so is any other time. If your objective is to protect the long-term value of your capital, you need to invest for the long-term. There is therefore no ?perfect time? to make the investment and short-term volatility should not have a significant impact on your long-term wealth. Jumping in and out of the markets can do more harm than good. Markets often provide their biggest returns when least expected, and missing the best days, even though it is just a few days, tends to result in considerably poorer returns.

These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon and attitude to risk of the investor. Past performance should not be seen as an indication of future performance. Seek personalised advice from a professional wealth manager like Blevins Franks.

By Bill Blevins, Managing Director, Blevins Franks

3rd February 2012

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