Watch the oil price as transport stocks set the tone

Writer, Russ Mould
Friday, November 21, 2014 - 12:00

Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

After October's wobble, global share prices appear to be finding their feet again, while Government bond markets also seem to be enjoying renewed calm, as yields grind lower and prices inch higher once more. Whether this is down to the application of fresh monetary anaesthetic, in the form of Japan's enhanced quantitative easing (QE) programme, a more upbeat view of the economy or hopes interest rates will stay lower for longer remains to be seen.

Bank of England Governor Mark Carney's interview with The Australian newspaper, published on Monday (17 Nov) offered featured references to “huge disinflationary forces” and warnings over the implications of soft commodity prices and economic weakness in Europe. On the same day the Old Lady of Threadneedle Street's chief economist, Andrew Haldane, made similarly dovish utterances and Tuesday's inflation figures will hardly have economists dashing to pull forward their forecasts for when the UK will first raise interest rates. A 1.3% year-on-year increase in the consumer price index and 2.3% rise in the retail price index were largely as expected and the bond market is pricing in the first hike in borrowing costs for some time in autumn 2015.

Inflation in the UK remains very subdued

Source: ONS

Such figures highlight how rates could well remain anchored at historic lows for some time to come, a development which could give a boost to stocks and bonds as clients continue their quest for a dependable yield and returns that are any improvement on the paltry nominal and real-terms prospects offered by cash.

The counter to this argument is subdued inflation reflects a lack of global growth and faltering corporate pricing power, trends which could even tip us into deflation. Oil's woes speak loudly here but given the huge size of sovereign debt piles central banks are likely to combat any recessionary fears with faster, looser policy. This scenario leaves clients stuck between a deflationary rock that favours bonds and cash and an inflationary hard place that points to equities, property and commodities such as precious metals, to perhaps emphasise the importance of a properly balanced portfolio.

Devaluation drive

Governor Carney has flagged how the Bank of England's forecasts only get inflation up to the target 2% mark in some three years' time. Sliding oil and commodity prices will have some influence here, although the role of Japan's latest round of QE and the Abe administration's tacit efforts to weaken the yen (seeThe race to the bottom begins again, 7 Nov 2014, here) may have a big role to play in this context.

If Tokyo's game is to deliberately drive its currency lower so it can export more aggressively then any planned price-cutting assault surely has the potential to be deflationary for the rest of the world. Japan's key trade rivals are already feeling the heat if their producer price, or factory gate, inflation indices are any guide. Research from investment bank Morgan Stanley shows that seven of Asia's ten leading economies are already suffering deflation using this measure.

Any trade battle with Japan and its sliding currency could see this exported to the rest of the world, especially if China, Korea or Taiwan for example get fed up with Tokyo and retaliate with policies designed to drive the renminbi, won or Taiwanese dollar lower. After all, Beijing has had to sit and suffer while its currency has risen by some 40% against the yen since 2012 and the risk of tit-for-tat policies designed to move currency markets is a big one as clients prepare their portfolios for 2015 and beyond.