Financial Mail - Investors Monthly - - Contents - Maarten Mit­tner

Global in­ter­est rate sce­nario to drive de­vel­op­ments

At the be­gin­ning of 2014 quan­ti­ta­tive eas­ing in the US was still in full swing and the “ta­per tantrum” of mid-2013 seemed to have been for­got­ten.

Greater liq­uid­ity en­cour­aged risk-tak­ing, driv­ing US and se­lected emerg­ing mar­kets higher. The JSE and Dow Jones in­dus­trial were no ex­cep­tion.

Doubts then de­vel­oped about how long eq­uity mar­kets could sus­tain high val­u­a­tions. The dip in Oc­to­ber caused a scare but by mid-Novem­ber this was al­ready for­got­ten. The Dow Jones on Novem­ber 14 was up 6.49% on the year, trad­ing at a new high of 17,653.79. The S&P 500 grew 10.33% for the year to date.

The JSE climbed 9.37% in the year. At an av­er­age price:earn­ings ra­tio of 17.3, the all share is not cheap any more. An­a­lysts say it is harder to find value.

Yet global mar­kets are still sup­ported by loose mon­e­tary poli­cies. The US Fed­eral Re­serve is ex­pected to start the hik­ing cy­cle in mid-2015, but Fed chair Janet Yellen says rates could stay low long af­ter­wards, de­pend­ing on how the econ­omy re­acts.

US Trea­suries have, con­trary to ex­pec­ta­tions, firmed in re­sponse, as the cap­i­tal mar­ket be­came the new safe haven. Yields on the bench­mark 10-year US Trea­sury have so far this year firmed 67 ba­sis points to 2.35%, after weak­en­ing to 3% in 2013.

The Bank of Eng­land is in no hurry to hike rates, dis­re­gard­ing its own guid­ance last year to start the process if un­em­ploy­ment dropped be­low 7%. The Euro­pean Cen­tral Bank is grap­pling with dis­in­fla­tion­ary and neg­a­tive growth con­cerns in the euro zone. Even Ger­many is stum­bling in in­dus­trial pro­duc­tion.

Th­ese re­al­i­ties have kept the dol­lar on the front foot and com­mod­ity prices have dropped to five-year lows. The euro has lost 9.7% against the dol­lar to mid-Novem­ber and the green­back has gained 6.7% against the rand.

After fall­ing in 2013, the gold price has fallen a fur­ther 3.8% so far this year and plat­inum is down 13%. The big­gest fall was in oil, Brent crude drop­ping 29% to mid-Novem­ber.

GDP growth in the US has im­proved, but re­mains near zero per­cent in the eu­ro­zone. In SA pro­jec­tions in 2014 have been cut to 1.4% from 2.7%. A rise to 2% is seen for 2015. China is ex­pected to grow at 7.1% this year, but could fall be­low this level in 2015.

Vo­latil­ity is sure to be the watch­word in 2015 as the global in­ter­est rate sce­nario un­folds.

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