Halloween comes early.

17th October 2014

Ian Copelin, Investment Director, my wealth comments “Markets are being easily spooked at the moment.

The biggest scares have been the:  Ebola virus; potential weaker global growth (and the chances of the Eurozone slipping back into recession); threat of deflation (especially in the Eurozone); weaker commodity prices (specifically oil); and geopolitics (specifically the Islamic State).

Consequently the market is not currently trading on fundamentals – it is trading on worries and the latest rumour or ‘what if?’ speculation:  what if Ebola becomes a global pandemic?  What if Ebola mutates and becomes more deadly?  What if IS takes-over Syria and Iraq?  What if the falling oil price means global demand and confidence is weakening?

And the problem with ‘what ifs?’ is that markets react emotionally rather than logically because they are unquantifiable – and this month’s equity moves have, as a result, been brutal.  A great example was on Monday (13 October) when it was reported that a number of passengers on-board an Emirates flight from Dubai to Boston were experiencing flu-like symptoms.  In the hour following the report, the US S&P 500 Index fell 1.2%, with airline stocks hurt the most.

However, whilst the current volatility can be unsettling, it is not a time to panic.

Although it is tragic to see the devastating impact of Ebola in West Africa, it is unlikely that we will see a major outbreak of Ebola in Europe or the US.  The market has always been hypersensitive to the break out of epidemics, but quickly shakes of the concerns once it is realised that outbreaks are limited and start to subside (remember SARS in 2003 and swine flu 6 years later).

While the volatility may continue in the short-term due to the current uncertainty, I currently see no reason why the long-term upward trajectory of equities won’t resume.

Yes, global growth has been mediocre, but it is headed in the right direction (and showing no signs of inflation or overheating).  For example, in the US (the world’s largest economy), the economy is expected to grow 1.5% this year and is likely to grow by in excess of 2.5% next year.  And because the recovery has been slow, some economic data releases have often been volatile and misleading, especially when looked at on a month-by-month basis.

US oil production has increased to nearly 9m barrels a day (the most since 1986 – helped by the US shale revolution) and this coupled with over-supply from OPEC (Saudi Arabia appears to prefer to let the price fall rather than give away market share to other OPEC members) has, I believe, been the cause of the recent weakness in the oil price, not weaker global demand.  And a cheaper oil price is good news as it can help economic growth:  cheap energy improves corporate profitability and means consumers have more money to spend on other things.

Although a lower oil price is deflationary, it does give central banks (such as the Bank of England and the US Federal Reserve) even more reason to keep their current low interest rates in place for longer.”