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Market Update

DECEMBER 2015 Update

Lack of inflation keeps interest rates on hold

December was a month of two halves for UK share prices. The stock market spent the first part of the month in steady decline. In part, this was due to weakness in energy and commodity prices. This was a theme that had a negative influence throughout 2015 because of the large number of global oil and mining companies that are listed in the UK.

But what is bad news for commodities companies has proved to be good for consumers. The slide in the oil price resulted in a fall in the price of petrol to below £1 a litre. The effects of low commodity prices are being felt throughout the wider economy and the lower cost of raw materials has contributed to a lack of inflation. Figures from the Office for National Statistics showed that consumer prices in the UK rose by just 0.1% over the twelve
months to the end of November. The lack of inflation means the Bank of England is likely to keep interest rates on hold for the time being.

In the US though, the Federal Reserve has started the process of raising interest rates for the first time since the onset of the financial crisis. However, December’s rise of 0.25% was modest and in line with most economists’ expectations. Investors had been nervous ahead of the Federal Reserve’s December rate setting meeting. But when the move was announced, it was taken as an expression of confidence in the strength of the US economy.

The effect of the US rate rise was also felt in bond markets. Although the move was expected, it resulted in a rise in bond yields and a fall in prices. Amid uncertainty about the durability of the economic recovery – mainly because of the slowdown in China – demand for government bonds remains relatively strong. But the rise in US rates contributed to a negative month overall for most major government bond markets.

Commercial property was easily the best performing major asset class in 2015 after enjoying another positive month in December. However, there have been some signs that growth is slowing. For example, although the volume of UK property transactions in 2015 is likely to prove similar to the previous year’s figure of £63 billion,
the bulk of activity took place in the first half of the year. Some investors are, therefore, starting to display an element of caution.

Commodities rounded off a negative year with yet another month of losses. Oil was one of the worst performers, with the price of Brent crude sliding nearly 20% in December to its lowest level in more than a decade. The price of oil has not been this low since the depths of the financial crisis. The main reason for the decline is a steep rise in global production. Saudi Arabia has decided not to cut production, as it competes for a larger share of the global oil market. This has contributed to the record levels of inventories and resulted in a 70% decline in oil prices over the past 18 months.

Should I make any changes to my investments?

Everyone’s circumstances are different and we aren’t able to give you advice on what is appropriate for you. As always, if you are considering your own position, you should remember why you invested in the first place and consider the lifespan of your investments. Most importantly, you should seek financial advice before making any changes to your investments.

One way in which you can help reduce the impact of any market volatility is to spread your investments across different asset classes and regions. For more information about investing across different asset classes, take a look at our An introduction to diversification in multi-asset funds guide.

Remember that before making any changes to your investments, you should seek financial advice. If you don’t have a financial adviser, you can find one local to you by visiting find a financial adviser, which is responsible for promoting financial advice in the UK.

All figures quoted are in sterling terms to 31 December 2015 unless otherwise stated.

The information contained in this article has been derived from sources which we consider to be reasonable and appropriate. It may also include our views and expectations, which cannot be taken as fact.

Investment markets and conditions can change rapidly and, as such, the views expressed in this update should not be taken as statements of fact nor be relied on when making investment decisions. Forecasts are opinions only, can not be guaranteed and should not be relied on when making investment decisions.

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