Market update – December 2014

iStock_000019552558XSmallInvestment growth has slowed this year, with the average balanced fund (in the Mixed Investment 20%-60% shares sector) returning 3.7% over the past year, compared with 8.8% in 2013. A number of factors have contributed to a turbulent year, but economic data looks positive for the year ahead.

Major equity indices generally rose over November as good news about the US economy and signs of continuing support from the European and Chinese central banks outweighed wider concerns about the outlook for global growth. However, crude oil prices fell to their lowest level for four years on fears of an environment of flagging demand and oversupply. These concerns were exacerbated by the news that Opec (the Organisation of the Petroleum Exporting Countries) had decided not to reduce its output and the lower oil price weighed on energy stocks over the month.

In the UK, investors experienced significant levels of daily volatility among leading energy shares, which fell heavily over the month. Nevertheless, the FTSE 100 index still rose 2.7% during November and investors were cheered by signs that growth in average earnings was finally catching up with inflation. The UK is currently the fastest growing, major developed economy in the world, with forecasted growth of 3% for 2014.

The predicament of the eurozone remained a headache for investors and central bank officials alike, with European Central Bank president Mario Draghi pledging to implement fresh measures, if necessary, to shore up the region’s flagging economy. The rate of inflation in the eurozone fell from 0.4% in October to 0.3% in November, fuelling fears over the possibility of deflation. The region’s economy registered quarterly growth of 0.2% during the third quarter of 2014, with Germany managing to avoid falling into recession and France’s economy performing better than expected. The former’s Dax index rose 7% during November, while the latter’s CAC 40 index rose 3.7%.

US share indices reached new highs in November as the Republican Party took control of the House of Representatives. The US economy grew more strongly during the third quarter of the year than previously estimated, expanding at an annualised rate of 3.9%. However, Federal Reserve policymakers remained uneasy over volatility in financial markets and ongoing signs of fragility in some overseas economies. The Dow Jones Industrial Average index rose 2.5% over November.

Having registered a second consecutive quarter of negative growth, Japan’s economy fell back into recession during the third quarter. Prime Minister Shinzo Abe called a snap election for December and announced that next October’s planned increase in consumption tax would be postponed. The Nikkei 225 index rose 6.4% over the month. Elsewhere in Asia, an unexpected cut in China’s interest rates was well received by investors.

Meanwhile President Vladimir Putin has sought to ease fears over Russia’s economy, insisting that the dramatic fall in the rouble will stabilise. Russia is on the verge of recession due to falling oil prices and sanctions over its role in the Ukraine crisis.

Mr Putin accepted Russia had failed to diversify its economy for the past two decades and relied too heavily on its oil and gas exports, accounting for 50% of government revenue. The rouble’s collapse came after a drastic 6.5% rise in Russian interest rates to 17%.

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