Janet spices up equities into the quarter end

The final estimate OF Q4 GDP for the UK economy was released on Thursday; the revised figure was modestly higher than previous estimates.  The UK economy grew 2.1% year on year against expectations of 1.9%. Business investment rose 3% in the final quarter year on year.


The quarter may be ending on a slightly dull note, however Janet Yellen spiced up equity investors once again earlier in the week with her dovish comments on the outlook for US interest rate rises this year. This modest bounce will mean in local currency terms global equities will finish the quarter down around 1%, according to the FTSE all world index. The investment community started the year underweight commodities, overweight Europe, and underweight emerging markets. As the quarter ends one of the best performing sectors has been commodity related stocks as the oil price recovered, Europe has underperformed both the UK and US indexes and Emerging Markets has been one of the best performing sectors. Once again going to prove that markets often move in the direction that causes the most pain to investors.


The consensus view appears to be that volatility will remain an ongoing theme for the year. This will be driven on the one hand, as low interest rates will boost equity valuations and on the other sluggish economic growth fears weighing on corporate earnings. Depending on which particular view is on the ascendancy at the time will dictate the equity market sentiment at that moment. As the first quarter has gone to prove consensus can often be wrong.


We will soon be entering the earnings season again, Alcoa who traditionally kick of the season report on the 11th of April. According to Factset analysts are forecasting the q1 US earnings to decline by 8.1% year on year. If this is the outcome it will be the fourth consecutive quarter of negative earnings growth.


It does feel strange to see US equity markets close to all time highs after three quarters of negative earnings growth, and this has led to quite a rerating of equity valuations. The US dollar has weakened over the first quarter and this weakness may offer a tailwind to earnings in the first quarter, hopefully analysts may be seen to be a little to conservative with expectations. 

Posted on March 31, 2016 .