Market Review And Strategy


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A market review provided by Edmond de Rothschild, who remains highly confident in their economic scenario.

By Edmond de Rothschild, July 2014

We remain highly confident in our economic scenario, with a preference for European equities ahead of US and Japanese equities.

In Japan, Prime Minster Shinzo Abe’s ‘third arrow’, the structural reform plan, has been unveiled and looks rather encouraging. Rather than a few grandstand measures, it comprises a multitude of small moves which overall represent significant advances, even if there is very little on the labour market where rigidity is viewed as an obstacle to change. Japanese equities performed poorly at the beginning of 2014 but in our view now represent a tactical buying opportunity; valuations are rather attractive and the environment is upbeat.

In the economic sphere, the US economy contracted by a very disappointing 2.9%* in the first quarter of 2014, but the stage is still set for the recovery and recent, second-quarter surveys have been encouraging. If our scenario is on track, this US recovery will help Europe to rebound after its recent loss of steam. Beijing has so far successfully steered Chinese growth through a very gradual slowdown, and barring a major geopolitical accident, the recovery in developed countries will forge ahead in coming months. Despite setbacks to the cycle in the first half, there are still grounds for hope!

With the exception of the long-term Shiller PE measurement of market valuation, absolute valuations like price earnings (PE) ratios have still not entered expensive territory. Coupled with still abundant liquidity, this means the situation is clearly favourable for markets. And merger and acquisition (M&A) momentum both in the US and in Europe is indisputably a short term positive for equity markets. As far as valuations are concerned, we cannot totally ignore the big shifts on bond markets – they may look expensive but everyone knows that rates are unlikely to return to levels prevailing in previous cycles. Fewer people in employment and lacklustre productivity gains have put a lid on potential growth in developed economies.

As a result, the US Federal Reserve Bank and the Bank of England revised down their forecasts of medium term benchmark rate trends in June. Slim yields were seen as a temporary feature of the 2008 financial crisis but they look likely to persist.

This could mean investors turning more to equity markets where expected returns are much higher. We cannot therefore rule out further multiple expansion on equity markets in spite of today’s valuations.

* Annualised, quarter-on-quarter data

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. Edmond de Rothschild is the source of all data. The value of investments can fall as well as rise, as can the income arising from them. Past performance should not be seen as an indication of future performance.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.