Market Noise

Are geopolitical forces to blame?

The last couple of days have seen equity markets being weaker on the back of very little news.

Some market commentators would argue that “geopolitical forces are causing liquidation and profit taking in the market”. More simply we would refer to this as investors’ behaviour taking the lead in the market.

With Scotland’s independence vote behind us and Russian news now muted, the market is focusing on relatively poor economic results in Europe (and German PMIs in particular). In fact, investors’ attention has shifted so much that at least for a morning, gains from an exposure to Russian equities would have been a nice partial hedge to some of the losses on the DAX.  Even Draghi’s commitment to a major purchasing program does not seem to comfort the market at this stage.

Nonetheless, German equities (as measured by the DAX Index) are trading at a relatively attractive valuation of 7.8% earnings yield, against a backdrop of stable earnings forecasts and accommodative monetary policy.

Figure 1: Are facts driving recent market behaviour?

Short term performance may well continue to be impacted by investors’ responses to volatile economic news. However, this is to be expected during a difficult recovery phase and should not be allowed to pollute longer term investment views.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.