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Markets welcome new resolve to fight IS

New resolve: US President Barack Obama talks with Russian President Vladimir Putin in Antalya, Turkey yesterday

Week ended November 13, 2015

Both the S&P Global 1200 and the S&P 500 (US) were lower last week — down 2.86 per cent and down 3.56 per cent respectively. For the S&P 500, this was the biggest drop since August. (For BIAS, the week before that was one of the best of the quarter, outperforming the global index by 151 basis points.) One can understand why investors lose confidence in the markets. Although this is not yet capitulation, such market performance could lead to such.

Over the weekend the horrific attacks on innocent people in Paris shocked the world into a new resolve to fight the scourge of Islamic State (IS). No longer is the problem limited to the Middle East as killings took place in France, Lebanon, and Kenya. Turkey claims to have thwarted an attack planned for Istanbul on the same day as the Paris attacks. World leaders converged on the resort of Antalya, Turkey, for the G20 Summit where Putin and Obama conferred as colleagues rather than adversaries in discussions on how to deal with IS.

The markets on the Monday after the attacks reflect the same resolve as our global leaders. US indices were up more than 1 per cent yesterday with European markets marginally higher. As stated in our October 5 article for this column, we believe that markets have drifted in recent months due to a lack of political leadership both in the US and globally. The new political determination to deal with IS is comforting to markets.

Still fundamentals are the greatest determinant of stock valuations and market performance over the long term. Politics may shade and colour the view of markets for a short time but in the long term fundamentals will rule. Right now as you read this article asset managers around the globe are debating their outlook for the markets in 2016.

JP Morgan, which has $20 trillion in assets under management, sees the outlook as being determined by whether the US and the global economy reflates or deflates. This is much the same as the typical Bermudian real estate investor trying to determine whether to buy or sell real estate — either the Bermuda economy turns around and produces more jobs creating greater demand for rental units and thereby higher commercial and residential rents, or the opposite occurs driving rents to even lower levels. At the end of the day the valuation of real estate is determined by the revenue flow from those holdings.

This is much the same with stock prices. Either economies reflate, encouraging greater demand for goods and services, or they deflate. World central bankers are trying to reflate their economies — good for stock valuations but not likely good for the value of their currencies in the near term. The US is the economy closest to reflation and hence likely to be the first major economy to raise interest rates.

Although the resolve of central bankers to reflate their economies may support global stock markets, investors are most wary of the lacklustre performance of their portfolios. For this reason volatility is likely to be a characteristic of stock markets for months to come.

Robert Pires is the chief executive officer of Bermuda Investment Advisory Services.