The FTSE 100 has closed today (14.10.14) at 6,392.7, up 0.42% on the day, but still down some 6.3% from the end of August, when (too early) our asset allocation switched back to 70% equities (from 65%). Has anything changed since then? Well, attention has been focused even more on the threat from ISIS in Syria and Iraq (although this was already pretty apparent). Most obviously, the Ebola outbreak has grown at an alarming rate and shares in airlines and tourism related companies have been particularly badly hit; but unless we see real contagion outside Africa, awful though the impact there is, it is unlikely to have too much effect on developed economies. Nonetheless, it is unsettling.
In economic terms, the euro-zone may seem to be slightly more precarious but the US and China, if anything, are looking stronger than they were at the end of August. On the plus side, the oil price has been falling (Brent crude is under $90 a barrel compared to $103.2) which should be increasing consumer spending power. Inflation remains subdued, with UK CPI announced today at 1.2% in September, down from 1.5% in August.
Short term interest rates in the US may rise soon, but this is hardly unexpected and a return to something like normality in rates should ultimately be good for equity investors. Moreover, the strengthening US dollar/weakening Euro should be beneficial to the euro-zone in avoiding deflation.
Will this downturn in markets continue? Of course, nobody can tell in the short term; one of the problems for investors is to assess how much of a negative feedback there is from the current volatility in stockmarkets into the real economy. In other words will current market falls affect business and consumer confidence negatively. History would suggest that (limited) medical crises have little other than a short term impact. Desperate though the plight is of many in Syria and Iraq, unless terror comes back to the West, the economic and confidence hit from the hostilities there should not be that great.
Our view is that for those wishing to add to their equity exposure (our guidance for medium risk long term investors is 70% equities), this is a reasonable time to do so. For easy overall market exposure there is Aberdeen UK Tracker (AUKT) (297.5) or for an exposure to UK high yielding equities via an Exchange Traded Fund (ETF) there is IUKD (844.75).