Monthly Market Report - January 2016

23rd December 2015

With commentary from David Stevenson

Now that the US Federal Reserve has, finally, made its move, the capital markets are now turning their attention to the Eurozone and the continuing adventures of Super Mario Draghi, the head of ECB. Many investors’ seemed to be shocked by his decision to in effect 'tinker' with quantitative easing, but it seems like he's probably done enough to keep the EURO rolling lower. Most hedge funds and institutional investors do not believe that we are even remotely approaching the end of QE in Eurozone, with the vast majority betting on even lower levels for the Euro dollar rate.

The good news though is that there's evidence of a pronounced recovery in Europe, with increasing PMI numbers and an improving economic backdrop. Draghi knows that price of oil is likely to rebound soon enough and so being too aggressive on rates would have risked over-egging the omelette. The reality on the ground is that Draghi does not need a lot of inflation to reverse inflation statistics. The year on year comparisons are so easy to beat it would only take a small increase in oil prices or wages to ensure that inflation rises. The current market reaction was probably an overreaction that will settle down and the original upward trend re-establish. The market had talked itself into a boost for asset prices, which they didn't get but that doesn't mean that we've seen the last of Mr Draghi's policy moves.

On another completely unrelated subject, at what point will the structured products world react to a profound shift in the ETF markets? The smart beta revolution can easily be derided as marketing hype but there's growing survey evidence which suggests that professional investors and advisers are actually, at long last, slowly shifting their money into funds which track more 'intelligent indices'. The latest survey was from ETF issuer Invesco Powershares (the research was run by CoreData). It showed that "smart beta strategies are gaining traction across Europe, with 69% of existing users saying they expect to increase their allocation in the next three years..." The report highlights that wealth respondents and financial advisers are increasingly turning to smart beta as an integral part of investor portfolios, with smart beta currently making up 9% of a user’s total portfolio.Of those that use smart beta, 91% of users say that it had met their expectations, and 78% recommend it for clients, colleagues and investment professionals."

These are impressive numbers and makes one wonder whether there's a big opportunity for structured products issuers to embrace this shift in attitudes and hard wire these "intelligent" indices into their new plans?

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