Global financial markets review: 2014 a year of two halves and more volatility to come

The year has undoubtedly been characterised by two distinct periods in global financial markets. The first, a period now being termed the continuation of an “unloved bull market” and the second a notable increase in volatility and a sell-off in risk assets.

Moving into 2014, an air of trepidation and uncertainty grappled market participants as equity (and fixed income markets) had witnessed considerable gains ever since the end of the financial crisis. Investor concerns emanated from the fact that the bond rally had been supported by unprecedentedly loose monetary policy from all major central banks maintaining plentiful liquidity and low interest rates within the global economy. This was broadly believed to be unsustainable as investors awaited the tapering of quantitative easing and expectations of eventual monetary tightening without addressing macroeconomic deficiencies which remained rife. In addition, significant concerns around multiple expansion driven equity returns as opposed to earnings growth driven returns concerned global investors. Despite this, equity markets continued a healthy rally into the first two quarters of 2014 on the back of global central bank’s continuous promises of supportive conditions as well as low opportunity costs of remaining invested in risk assets.

Moving into the third quarter, following a build-up of a number of worrying signals, volatility spiked from historical lows as the bull market begun showing elements of fallibility on the back of disappointing global economic indicators. Sentiment proved to ultimately remain delicate and the correction erased a significant portion of the gains enjoyed earlier in the year on all major indices.

Given increased anecdotal evidence of investor sentiment remaining volatile, financial asset price performance is likely to remain unpredictable in the near future.

 

2015 to be defined by increased volatility and uncertainty

Factors likely to affect financial market performance into 2015 include:

  1. Central bank activity and the rate at which monetary policy is tightened globally or surprises in monetary policy.
  2. Geopolitical risks such as those emanating from Russia and Hong Kong.
  3. Inability to curb the Ebola virus.
  4. Global growth expectations.
  5. Corporate earnings updates are likely to prove key to equity market performance. Delivery of top line earnings growth remains critical as trading multiples have expanded considerably.
  6. Macroeconomic data surprises positive or negative is likely to affect asset prices to an exaggerated degree. Financial assets dependent on momentous economic tailwinds are especially vulnerable to such data releases.

 

By Nadir Thokan, Investment Strategist, 27four Investment Managers