The latest UK inflation report came in slightly ahead of expectations, despite this UK inflation remains a long way from the Bank of England’s 2% target. Those who favour a rate rise do so as they believe the reasons that inflation has been falling, mainly lower food and energy prices will fallout of the equation in the months ahead, and therefore favour a rate rise in anticipation.
Possibly because most current market commentators have experienced several boom and busts in stock markets over the past 30 years, after what they consider to be the latest boom, the game is anticipating the next bust . The 40pct rise in the FTSE 100 in the first nine months of 1987 leading to a crash of similar proportions that took three days. Then the was the tech bubble, and obviously more recently the 2007 stock market crash caused by excessive leverage, the usual cause for market collapses.
If we look back at what has changed in the past twelve months, firstly as we comment on in this piece the news flow is remarkably similar. Global economic growth concerns remain, global growth was expected to be in the region of 3% in 2014, somewhat akin to what is expected for this year. The Chinese economy was supposed to grow in 2014 at 7.5% and in 2015 at 7%, those figures are probably both overstated. Liquidity remains accommodative, as QE in the US has been replaced with the ECB buying in bonds at the start of 2015. Greece’s fate remained an issue and still does, even though another Elastoplast has been placed over the wound.
One difference from this time last year, commodity prices have fallen sharply, caused by a combination of supply and a lack of demand. Falling oil prices should boost consumer spending and provide support to the global economy. One of the Sunday papers suggested that the fall in the oil price could add £10bn to the UK household. US treasury yields are roughly where they were this time last year. Global interest rates have stayed where they are, if anything for choice we have seen further cuts this year. The US dollar has gained about 15% in the past 12 months against its basket of other currencies. The MSCI world index is roughly where it was this time last year in US dollar terms.
So what is the conclusion to all of this? Looking ahead to the next 12 months, interest rates are liable to remain close to where they are, liquidity should remain abundant. Economic growth is forecast at present to remain close to 3%, commodity prices are probably not rising. Expectations for the S&P 500 companies overall the year are 127 dollars per share (factset), again roughly where they were this time last year. The final answer could be that markets repeat what they have done in the past 12 months in the next 12 months. Periods of volatility but ultimately global markets remain little changed.