Report on Q4 2014

Report on Q4 2014

5 Jan 2015

In a confusing financial and political world in Q4, the UK stock market offered small but notable evidence of calm in as much as the FTSE 250 (+4.5%) easily outpeformed the FTSE 100 (-0.9%), reversing the trend seen in Q2 and Q3. Normally, larger shares perform better in nervous times as they are seen as safer havens. In the case of this quarter, the collapse of oil and oil sensistive shares (including other resource and energy related companies) may have delivered a particular blow to the FTSE but I am still inclined to take the 4% gain in the FTSE 250 at face value.

For 2014 as a whole, the FTSE fell by 2.7% following a rise of 13.9% in 2013.

Once again, major governmrnt bond yields provided a supportive background. German 10 year Bund yields fell in the quarter from 0.93% to 0.54%. A year ago they were 1.96%. 10 year Gilt yields have fallen from 2.88% to 1.72%. While these seems incredibly low to anyone who has followed gilts over the years, it could be seen as high when compared to the equivalents in Spain (1.62%) and Ireland (1.25%) and France (0.83%).

Last quarter I wrote that “bond markets are shrieking the news that global growth has made a long-term shift to lower levels”. The fall of nearly 30% in the oil price in Q4 appears to confirm this view, though it can be argued that a cut of this scale in the price of such a key commodity will ultimately benefit the economies of all countries that do not depend on oil revenues.Initially, though, the effect is more likely to be felt by oil producers and will play out as generally negative in the short term. See my next blog post for more discussion on this.

In the UK, the political future appears more important than usual. But it does not seem likely that a change of government would result in a great expansion of government spending. Nor does it seem probable that a referendum would result in a vote for the UK to leave the EU. Most of the political outcomes that frighten investors are highly unlikely and their probability is being overestimated in the media, at least.

It is slightly upsetting to me, personally, that the whole electoral debate seems to be about the distribution of wealth (how much, how quickly and to whom?) and that the public is deemed to be uninterested in the topic of wealth creation. As an investor, though, I do not mind because the idea that government might feel the need to get involved in wealth creation is not appealing.

Yet there is one area where our government has been able to stimulate the economy by direct though technically arms’ length intervention: fines for misbehaving banks. In the US these are above $250 billion and rising. In the UK, more than £20 billion has been paid out, directly to householders,  in PPI fines alone.  Thus, the price of the bail-outs is gradually reclaimed. In the UK, this cash has to some extent appeared in consumer spending. This is possibly good news for retail stocks but banks remain, in my view, uninvestible. 

One comment

  1. William Austin /

    Jonathan, where do you expect Drax to end up now, a good buy at sub £4?

Leave a Reply