March CPD Newsbrief – Investment principles and risk
Low interest in forward guidance
Six months ago the new Governor of the Bank of England, Mark Carney, introduced ‘forward guidance’, but it hasn’t worked out quite as he planned.
Specifically, Mr Carney said that the Bank’s Monetary Policy Committee (MPC) would not even consider raising interest rates until the unemployment rate had fallen to 7% or below.
By the end of 2013, Britain’s unemployment rate had fallen sharply to 7.1%, which the MPC had not expected to happen until 2016.
In interviews in January 2014 Mr Carney stated that forward guidance would therefore need to “evolve”. He also stated that the new approach would begin in the MPC’s February 2014 Inflation Report which when released on 12 February outlined the next phase of forward guidance.
- The MPC sets policy to achieve the 2% inflation target, and, to support the Government’s economic policies:
- There remains scope to absorb spare capacity further before raising Bank Rate;
- When Bank Rate does begin to rise, the appropriate rate of increase over the next two to three years is expected to be gradual;
- Even when the economy has returned to normal levels of capacity and inflation is close to the target, the appropriate level of Bank Rate is likely to be materially below the 5% level set on average by the Committee prior to the financial crisis;
- The MPC intends to maintain the stock of purchased assets at least until the first rise in Bank Rate.
The MPC also stated that it will keep interest rates at 0.5% for at least another year, despite forecasting strong growth of 3.4% in 2014. It further stated that in making any future interest rate decisions that these will be based on a wide range of economic indicators that the MPC will publish so others can see the basis of the MPC’s forward thinking.
Foreign exchange takes a beating
The International Monetary Fund’s (IMF) has predicted that growth in emerging market and developing economies will increase, overall, to 5.1% in 2014 and to 5.4% in 2015.
There are, of course, risks to that relatively optimistic outlook for these economies. Most notable among them is the threat from a reversal of the flow of cheap capital that these economies have enjoyed in the last few years. Just such a reversal is already underway. Beginning in May last year– when Ben Bernanke, then Chairman of the Federal Reserve–first mooted some tapering in the pace of its stimulus package. Merging market currencies have fallen, causing some commentators to see ghosts of the 1997 Asian currency crisis.
The South African rand is down 18%. The Indian rupee fell as far as 21% before some impressive footwork by the new Governor of the Reserve Bank of India, Raghuram Rajan, halted and then reversed much of the decline. In January 2014 the Turkish central bank hiked its main policy rate by a whopping 4.25% (from 7.75% to 12%) and, according to the Financial Times, used up “$3 billion of its $40 billion reserves” in defending the lira.
The comparison with the Asian currency crisis is perhaps excessively dramatic. In contrast with 1997, central banks in the emerging markets now have two advantages: huge reserves and flexible (as opposed to fixed) exchange rates.
If these emerging and developing economies can keep inflation under control without damaging growth prospects too deeply, there ought to be no reason for panic. But even in extraordinary times, as usual much depends on the ability of central bankers to avoid policy mistakes.
Global dividends reach record $1 trillion
Research by Henderson Global Investors (HGI) has found that the value of dividends paid by the world’s listed businesses has exceeded $1 trillion (£600 billion) for the first time.
HGI’s Global Dividend Index reveals that global dividend payouts reached a record $1.03 trillion over the course of 2013 – an increase of $310 billion over the past five years.
Payouts by UK companies have been in line with the global average, rising 39% since 2009. However, HGI says that the UK’s share of the global total is “disproportionately large” compared with the size of its economy, at 11%.
Firms in the US have lifted their dividends by 49% over the past five years, with the US being the largest source of dividend income with payouts worth a collective $301.9 billion. Dividends from Europe ex UK, however, have increased by just 8% since 2009 to reach $199.8 billion. Despite this weak growth, the region is still the second most important in the world for income.
Businesses in the emerging markets doubled dividends between 2009 and 2011, but growth has stalled in more recent years. Emerging markets now make up $1 in every $7 of global payouts.
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