Equity markets have made healthy gains so far this year, with investors spurred on by the promises of policy support from the major Central Banks. It hasn’t been a one-way trip, though, with a heightened level of volatility experienced since April: markets fell slightly, rallied sharply, fell drastically and have subsequently recovered as quickly as they had fallen. It hasn’t just been equities moving sharply either; many bond and commodity assets have also been subject to rapid moves in recent months.
The three key issues so far in 2013 can be highlighted as being Cyprus, Chinese growth and the outlook for American stimulus. The first related to the sudden collapse of the two biggest Cypriot banks, after a period of relative calm in the Eurozone. The initial proposals suggested a levy be taken from every single deposit account, regardless of the guaranteed €100,000 sum, but this folly was fortunately revised before the possibility of a bank run in similarly troubled nations could start. The storm blew over as quickly as it had arrived. Chinese growth, meanwhile, is slowing down. In addition, the central government has been squeezing the financial sector to try and curb lending excesses that may pose problems in years to come. Where China’s industrial and financial sectors go from here will be important to watch for the rest of the year.
Most important, however, is the situation in America regarding the on-going $85bn per month stimulus (QE) provided by asset purchases. Quite separate from interest rate policy, it is inevitable that this support will end at some point – as the alternative would mean that the US economy was unable to recover to normal activity levels. When Fed President Ben Bernanke publicly discussed “tapering” this stimulus lower, however, investors reacted negatively and all markets sold off sharply – equities, bonds and commodities. A couple of weeks later, the same points were repeated, emphasising that interest rates are a separate issue and they will remain at historic lows regardless of any change in QE. Same message, different day – and equities have subsequently rallied strongly. This kind of sensitivity to policy messages simply means that applying well-reasoned principles to investment decisions is critical.
Although energy policy and fracking (as discussed in the previous commentary) have continued to generate plenty of headlines, so too has the issue of the supply chain for consumer goods. There have been two very different but very important developments so far in 2013; one was the “horsemeat scandal” that began in January, while the other was the tragic loss of life at the Rana Plaza building in Bangladesh. Perhaps the biggest concern over the former was not the fact that horsemeat was being passed off as beef, but that it had managed to enter the food chain fraudulently despite the likes of supermarket suppliers apparently being stringently vetted. What transpired was the long and complex chain by which food was moved around Europe, allowing unscrupulous operators the chance to evade detection.
The Bangladesh disaster cost 1,129 lives, with workers in a garment factory ordered in to work in a building that was unsafe and duly collapsed. The spotlight fell on the unsafe working conditions and lack of labour protection in such factories, which allow for the sale of cheap garments to the Western consumer. Many people would be horrified to realise the conditions that workers in distant countries are exposed to in order for such low selling prices to be achieved. What both of these developments have shown is a greater need to audit supply chains and have household names able to pinpoint as far as possible where their products are sourced from. Change is already underway in response to both of these developments and this is a powerful trend we can gladly expect to continue.