Market update – October 2014

iStock_000019552558XSmallStock markets are steadily recovering from October’s dip, caused by a combination of fears over the slowing global economy, escalating Mideast violence, continuing Russian conflict, and the spreading Ebola virus.

On the last day of September, the Dow Jones industrial average had climbed as high as 17,145, having reached an all time record high of 17,350 on 19 September. Today it stands at 16,974, having dipped as low as 15,855 during October. The FTSE100 finished September at 6,623, dipped to a low of 6,072 during October and now stands at 6,454.

Funds in the balanced sector (IMA 20%-60% Shares) dipped an average of 0.7% over the past month but have still returned an average of 2.1% year to date and a healthy 19.7% over the past 3 years. The IMA Flexible Investment sector dipped 2.0% over the past month but is slightly up year to date and the average return over 3 years is a substantial 23.3% (all figures as at 29.10.2014).

The still-United Kingdom is getting back to business. After months of political uncertainty, Scotland voted to remain as part of the UK’s political union – and by a larger margin than expected. The focus now turns to the strength of the economy and whether the Bank of England will start to normalise monetary policy in the near future.

In the end, the victory of the pro-union camp was wider than most of the polls had suggested. With an enormous turnout of 84.6%, Scotland backed the union by 55.3% to 44.7%. The immediate reaction was a bounce in sterling against both the dollar and the euro, but also a rise in prices of stocks that are either Scottish-based, or with significant business in Scotland.

Continuation of the union also means the risk of the UK’s exit from the European Union (EU) has been reduced, although it does remain significant. Scottish residents are more in favour of remaining in the EU, compared to the rest of the UK where the majority favour an exit.

Geopolitical tensions and concerns over the economic outlook have continued to tarnish investor confidence in Europe. Sentiment in Germany registered its ninth consecutive month of decline in September, dampened by economic uncertainty and worries over the situation in Ukraine. Meanwhile, the European Union revealed a new raft of sanctions against Russia, which included curbs on access to loans for large state-owned Russian banks and restrictions on exports from Russia’s oil sector.

Eurozone interest rates were cut to a new low of 0.05% by the European Central Bank and policymakers also announced a programme of measures intended to support the economy and encourage the region’s banks to lend. The annualised rate of inflation in the eurozone declined to 0.3% during September, compared with 0.4% in August, compounding concerns that the euro area is slipping into deflation and fuelling speculation central bank policymakers might have to implement further stimulus measures.

The Organisation for Economic Co-operation & Development cut its forecast for growth in the eurozone’s economy during 2014 from 1.2% to 0.8%. Describing the eurozone’s economic recovery as “disappointing” – particularly in Germany, France, and Italy – the body highlighted the challenges of weakening confidence and “anaemic” demand and warned that several peripheral countries still face “significant” structural and fiscal problems.

On a more positive note, Ireland’s government declared an end to seven years of austerity, announcing small cuts in income tax rates as the first step in a three-year program to ensure workers hold on to more of their earnings while also increasing spending.

One of the country’s leading think-tanks has claimed Ireland will have one of the fastest growing economies in Europe this year, with the Economic and Social Research Institute (ESRI) forecasting Gross National Product (GNP) will grow by 5% this year and next.

Provisional results also show growth of 0.3% for the NI economy during the second quarter of 2014. The number of people claiming unemployment benefit here continues to fall and the unemployment rate is now 6.6%, although still higher than the UK average of 6.2%.

Residential property prices in Northern Ireland have increased by 10% over the past year and are now 1% above 2005 prices.

Meanwhile in the US, the Federal Reserve has announced it is ending its quantitative easing (QE) stimulus programme begun in 2008. The central bank, which also said it would not raise interest rates for a “considerable time”, has gradually cut back QE since last year.

The Fed said it was confident the US economic recovery would continue, despite a global economic slowdown. It suggested that although the jobs market is strengthening, it is still not back to normal, which is why interest rates are being held.

Back in the UK, Tesco’s woes continue with the announcement that the Serious Fraud Office is carrying out a criminal investigation into its accounting irregularities – overstating profits by £263million.

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The value of your investment can go down as well as up and you may not get back as much as you originally invested.

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