Monthly Market Report - August 2015

29th July 2015

With commentary from David Stevenson

Crisis averted, again. Investors have been closely watching events in Greece although I'd argue that by the closing stages a general sense of weariness had emerged. Frankly the markets could do with NOT talking about Greece for at least a few months. China has taken top slot as the key debate in recent weeks, with the local stock markets in free fall and bears warning that we're mid-way through another enormous increase in leverage and debt which could in turn result in a hard landing for the wider economy. But arguably investors are missing what's the most important story of the second half of 2015, namely interest rates, and the possibility that central banks in the US and the UK might start tightening monetary policy as early as September of this year.

Most analysts don't think any large increases are likely and central bankers have been suggesting that even after any increases, interest rates are likely to stay well below long term averages of around 4.5% to 5%. The consensus is that rates might peak at about 2% to 2.5%, although that also suggests that if each incremental increase is in the 0.25% range, we could be in for at least another 4 to 6 rate rises over the new few years. Quite how markets will respond is anyone's guess. On the one hand investors will worry that rate rises might strangle any economic recovery and prompt a general repricing of risk - interest rates are used as a reference point for models such as discounted cash flow and thus any increase in rates must by default involve the repricing of financial assets value. But a gentle increase in interest rates is also a signal that the economy is strengthening which should be positive for equity investors.

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