The theme of a weakening oil price has now been in place for over five months now. The eyes of both oil producers and consumers alike were trained on the OPEC meeting at the end of November in case the global oil cartel, which controls almost a third of global supply, would cut output in an attempt to bolster prices. No reduction in supply came, leading to a sharp fall in price, the share prices of oil-related companies falling in concert. Although negative for the production side of the equation, lower oil prices have a positive impact on those that consume it directly or indirectly, providing one form of stimulus to the global economy that is not dependent on central banks.
We have also seen some dramatic moves in the sovereign bond space. This is particularly the case in Europe where falling inflationary expectations, partly thanks to a lower oil price, have combined with numerous comments by Mario Draghi and his associates at the European Central Bank about potential market interventions. Whether US/UK style asset purchases will have the same positive impact on European sentiment and growth remains to be seen but this has not stopped investors moving to areas where they expect central bank buying to be focused.
The yield one now receives lending to the German government for 10 years is a miserly 0.7 per cent, with yields of only 1 per cent, 1.9 per cent and 2 per cent on offer from the perceived structurally challenged counties of France, Spain and Italy respectively.
UK government bond yields have also been dragged down, moving from 2.2 per cent at the start of the month to 1.9 per cent by the end, whereas US government bond yields have been firmer around the 2.2 per cent level. We continue to view Western sovereign bonds as unattractive on a medium- to long-term timeframe, short of a prolonged deflationary scenario, which the Western world’s central bankers have proven themselves determined to avoid.
Looking eastwards, Japan has once again been in the headlines, postponing the next increase in its consumption tax previously scheduled for October, following a fall in its headline economic growth figures and thus plunging the economy into a technical recession.
On the back of this news, Prime Minister Abe took the unexpected step of dissolving parliament and announcing a snap election to take place, which he won last weekend. His re-election provided vindication for his economic policies, known as Abenomics, targeting sustainable growth and inflation for a country which has spent the last 20 years with little of either.
China also reduced its interest rate as its authorities attempt to smooth the country’s economic transition from high growth building and industry towards a more consumer-focused growth model.
In a world of low interest rates, falling inflationary pressures and limited economic growth, investors have become increasingly focused on areas and companies that offer sustainable earnings growth, yields or attractive revenue prospects. Sectors of the market that have been particular beneficiaries of these recent trends include the likes of consumer staples and healthcare. These often termed ‘defensive’ sectors are not often those that lead market recoveries but their attractive characteristics have been in high demand of late.
John Chatfeild-Roberts is chief investment officer at Jupiter Asset Management