Resilience Of US Stock Market Is Surprising -- Aberdeen Asset Management
1 Oct 2014
(Kitco News) – The Standard & Poor’s 500 stock index is up about 7% so far this year, and its resilience is surprising, said two fund managers for a Scottish investment firm.
Stocks have managed to rise even as the Federal Reserve is removing liquidity as it winds down its asset-purchase program, and the geopolitical troubles haven’t dented equity indexes much. The S&P 500 is down about 3% from the all-time high made in September, but is still holding most of its gains. That’s in contrast to gold, which is essentially flat on the year. Comex December gold is only about $10 above its Dec. 31 settlement price of $1,205.70 an ounce.
“We’re a little bit surprised is how resilient the equity markets have been. When you see the backdrop of what’s going on globally, with Syria, Iraq, Ukraine, now Hong Kong, there are lots of global problems, but the market seems to shaken these off,” said Bev Hendry, co-head of the Americas for Aberdeen Asset Management and chief financial officer, an investment house with about $541 billion under management.
Hendry is co-head with Andrew Smith, who is also Aberdeen’s chief operating officer. The two are newly appointed to the co-head of Americas role.
What’s fueling the gains in the equity markets is the U.S. economy, which is showing stabilization signs, Hendry said.
“The U.S. economy – it’s not been booming, but it’s certainly the one economy the world is looking at,” he said.
Hendry gave the example of a meeting he had with the Qatar Investment Authority last week in New York City while they were visiting for the United Nations summit.
“They were looking to invest in the U.S. They thought the U.S. was the one area where growth was strong and continues to be strong,” he said.
Smith said the stock market is likely finding funding support from pension funds seeking higher returns. Both private and public pension funds are heavily underfunded versus their obligations, and Smith said it’s likely the funds have kept a higher-than-normal equities weighting as stocks have outperformed the past few years.
“I think they’re keeping a higher-than-normal weighting than traditional exposure to equities because they (equities) are continuing to go up, certainly in the U.S.,” he said.
As that funding gap shortens, though, Smith said pension funds may start to lower those equity weightings back to more traditional core investments.
“Everyone talks traditional core products, core fixed income and large cap,” Smith said, later adding, “when interest rates turn around, and if they (pension funds) close their underfunding, I wonder whether core (funds) and core-plus (funds) might see a resurgence in their appeal.”
Volatility in the markets is starting to pick up after a very low volatility environment just a few months ago. That offers some opportunities for investors, but Smith said it’s also another reason to have a diversified portfolio.
Dollar Strength To Remain
The strength in the U.S. dollar, particularly since July, has grabbed the financial market’s attention. For the year, the U.S. dollar index is up 7% and is trading at its highest level since June 2010. With the Fed ending its quantitative-easing program, possibly as soon as this month, and the European Central Bank and Bank of Japan adding liquidity to their respective balance sheets, the dollar has risen.
Hendry said the dollar strength is two-fold.
The strength is “not a surprise to me. Again, the economy here is slowly picking up. Also, with what is going on worldwide geopolitically, the dollar has always been seen as a safe haven. I expect it to remain (strong) until we see big economic improvement elsewhere,” he said.
Both Hendry and Smith said they expect the equity markets to remain positive.
“I think it’s still sustainable. It’s not like it’s moving at a rocket’s pace. So far we’ve been able to accept some of these major (geopolitical) events. Plus there’s nowhere else for the money to go,” Hendry said, commenting on the low yields offered by fixed-income products.
Smith said they are “cautiously optimistic” regarding equities, noting how well the market has held up in the face of some severe geopolitical tremors, such as when the Malaysian Airlines jet was shot down over Ukraine.
“World wars have been started by things like when that plane was brought down…. The markets haven’t moved. So we’re cautious. There could be a bump (where prices fall). We’re hoping that there’s not,” he said.