Economic fundamentals are worrying the markets with Equity prices having been overstretched by Quantitative Easing (QE). In early 2014 developed markets had pulled out of recession with the UK economy growing at 3%, however, our largest trading partner, the Eurozone, continues to cause concern. France, Italy, Spain and Greece are in recession and risk deflation. China is now concerned about deflation. So who would invest in the global market if prices are falling?
The US market looked good in the first half of 2014 but 3.5 trillion dollars of new money has been printed since the start of QE, which has pushed up and sustained the market. The tap is being turned off this month and this creates uncertainty. The US and UK will move to tighten fiscal policy and will look to raise interest rates next year. The US dollar has strengthened by 8-10 % over the last 3 months which has an impact on oil prices, seeing the price per barrel drop toward the break-even price for extraction of $80. Cheaper oil should benefit everyone except the oil companies.
In early 2014, in the UK, economic prospects were improving so company profits were expected to increase by 8-10% and therefore share prices forecast to rise, but earnings are well below expectation and therefore share prices are falling back in line with earnings growth.
Markets hate uncertainty – Equities are neither cheap nor expensive. They are fair value and are now better value than a week ago.
Housing makes up 3% of GDP in the UK and 80% of UK residential property is privately owned. Only 37% of UK households have a mortgage. UK house prices have increased by 98 times since the Nationwide Building Society records began in 1954.
This equates to a real return after inflation to 2.6% per annum and in Northern Ireland the figure is 2.1% ( at present though they are down – 19.4% from their peak).
Analysts are predicting positive house price inflation for the foreseeable future, as supply remains low.
London is a special case – in 2009 Sterling fell 25% which was a ‘buy signal’ to foreign investors.
In 2013 75% of London property was purchased by overseas investors.
Two boroughs in London – Kensington/ Chelsea and Westminster have housing stock worth £200 billion that is 15% more than the combined value of all the property in Wales.
Markets expect interest rates to rise in both US and UK next year but predict 3%, as being the likely top of the interest rate cycle, with rises in ¼% increments.
So, London apart, there is no housing bubble at present
At Fitch Wealth we believe in holding a diversified portfolio of carefully selected assets and reviewing these on a regular basis. Therefore, if the current market volatility causes you concern please give us a call to discuss your options.
This article represents a personal view from Adrian Bell and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision.