Monthly commentary - March 2016

Global monetary policy loosened noticeably last month. Further stimulus from the European Central Bank, rumours of even heavier bond buying from the Bank of Japan, and a dovish US Federal Reserve have been a boon for asset prices.

After a dreary start to the year, markets perked up in March. The S&P 500 has been particularly buoyant, rising 6.7% in local currency total return terms. The Topix and the Euro Stoxx followed close behind, up 4.8% and 2.8% respectively. The FTSE All-Share increased 1.9%, while the Shanghai Stock Exchange Composite soared 11.8% (it remains down 15.1% year to date). The S&P 500 and the FTSE 100 are now in positive territory for the year (the FTSE All-Share is down 0.4%); Japanese stocks are down 12% over the first quarter and European markets are down 6.5%.

ECB President Mario Draghi cut deposit rates further into negative territory while expanding the QE programme by €20bn to €80bn a month. The central bank’s purchasing programme will also include corporate bonds for the first time. For its part, the US Federal Reserve has been wary of frightening markets. Fed chair Janet Yellen ended the month with a speech that pushed expectations of a rate hike back further than the tentative June consensus. Despite her caution, US macroeconomic data have been solid, in the main, including nonfarm payrolls, which showed higher-than-expected jobs growth in March. However, several contradictory signals are still flashing for investors: business confidence has rebounded in the past couple of months, but corporate earnings growth has slowed.

UK Chancellor George Osborne walked into an ambush with his Budget. The Tory number two had a tough job this time round, with lower revenues, turbulent markets and mutinous eurosceptic backbenchers to appease. His cautious effort foundered after cabinet minister Iain Duncan Smith resigned in protest of Mr Osborne’s proposal to slash both disability benefits and the capital gains tax rate. The government quickly dropped its plans and is now looking for a new way to shore up its Budget.

Chinese Premier Li Keqiang had less trouble with his fiscal forecasts. Last month he set a punchy growth target of 6.5% to 7% each year for the next half-decade. This despite Chinese export numbers slumping to lows not seen since the global financial crisis. Mr Keqiang unveiled a stimulus package as well, which sent the nation’s share markets shooting upward. For years China’s growth rate has been artificially inflated by spending money on bridges to nowhere and unviable factories. Its leaders have been forthright in their ambition to leave this by the wayside and foster a market-led economy. We hope their conviction will not falter when conditions get difficult. 

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