18 December 2015

It was a protracted build up to say the least. And the Y2K-like fears the world would implode after the first US interest rate rise in almost a decade proved unfounded with the muted market reaction to Janet Yellen finally pulling the trigger Wednesday evening. While we would normally cheer heightened volatility in terms of an opportunities to make money both on the way up and down, it was actually nice to see, bearing in mind the over-hyped concerns of market meltdown. Markets even rallied, welcoming clarity and evaporation of the cloud of uncertainty which had hung over us for so long. Phew!

This shows maturity after years of crises and extreme policy. In which case, assuming the Fed doesn’t dare raise rates too quickly and peers are nowhere near hiking, we can focus on the other positives. The rate hike is a vote of confidence in the world’s #1 economy which could help raise others like the struggling Eurozone and emerging markets. Major central bank policy (Fed, BoE, ECB, BoJ) remains highly accommodative and rock bottom rates, in some case negative, won’t return to anything meaningful for many years. Cheap money is still good for equities and stimulus could yet boosted. So while we may have taken a step towards US policy normalisation (in truth we did that 2 years ago when the Fed began tapering its bond-buying stimulus) we remain a very long way from the old normal.

The UK Index ’s key commodities sector remains very depressed but after corrections of up to 80% by both the raw material prices and their miners/drillers we are certainly nearer the bottom. This means upside and recovery potential when we start getting improved news-flow from both the supply- (miners, drillers, OPEC) and demand side (China, Eurozone, Emerging markets). With plenty of other stocks at discounted multi-year lows on account of drivers not much changed over the last six months (slowing China, struggling Europe, Fed rate rise, commodity supply glut), we ask whether the negatives that have dogged us for so long are well and truly priced in and the stocks thus oversold.

The move into 2016 is sure to see the usual interest in the prior year’s laggards. And with half the index still under water for the year in terms of share price performance there are plenty to choose from in terms of recovery candidates. Contact us for the list. You might be surprised at what you find.

Mike van Dulken, Head of Research