Tag Archives: Bank of England

Why central banks are relevant for you, investor?

When you read the newspaper, you find always news about the Fed, the ECB, the BoE or the BoJ. These are the initials of the most important central banks: the Federal Reserve in US, the European Central Bank for the euro-countries, the Bank of England in Great Britain and the Bank of Japan. This year, another bank has emerged because of the influence of its decisions in the global economy: the People’s Bank of China.

What are these banks? They are not commercial banks, but they have relevant tasks for the economies. The origin of each is different: for instance, the Fed was created before de WWI after a deep banking crisis; the ECB is the result of an agreement amongst the countries which use the euro as a currency…

What are the main tasks? Well, central banks have the monopoly of printing money. Due to this responsibility, they control the monetary policy through the main instrument: the interest rate. This regulates the amount of money in the system. They are also lenders of last resort for commercial banks. Of course, the tasks can be wider depending the country. For instance, if the currency is pegged to another, they decide also the exchange rate.

Why do they have such influence? Governments delegate the monetary policy in these institutions. They usually have the mandate of controlling the inflation. This is the main role for the ECB in Europe. The mandate of the Fed, on the contrary, is double, because it has to take into account not only the inflation, but also the economic growth. Decisions have to be taken in order to achieve both.

As an investor, why are they relevant for me? You surely have heard the news in August about the drop of the stock exchanges. The origin was in the sudden decisions of the People’s Bank of China, which devaluated the yuan three times in three days. The worldwide effects can be perceived in this chart:

T-Advisor chart with the impact of the devaluation of the yuan in the stock exchanges last August

This is not the only example. The exchanges follow continuously the steps of these banks, as the interest rate has a relevant influence in the evolution of the economy or the companies. For instance, it is expected that the Fed tightens this year its monetary policy increasing the interest rate. The debate has been continuous since the last year and keeps on. As a result, the S&P was quite unstable in the last 12 months. It is relevant the drop before Christmas, when the Fed met for last time in 2014:

S&P evolution in the last year

The relevance of the Fed is also huge in the commodity markets, as they are nominated in dollars. In the case of the ECB, it has built an own vocabulary. It was famous with the former president Jean-Claude Trichet that the increase of the rates was announced two months before saying that the institution was “vigilant” with the price evolution and a month before saying “very vigilant”. The bank prefers to be foreseeable in order to avoid sudden market movements. Current chairman Mario Draghi was also famous, because his words defending the euro stopped the instability over this currency in 2012.

In any case, you, as an investor, should watch what the central banks say. If you are a trader, follow every word. If you are a long-term investor, take care of the statements to rebalance your portfolio in certain moments.

United Kingdom: in the crossroads about the EU

United Kingdom has opened widely its economy since the beginning of the conservative governments in the 80s to become a service and financial country. Canary Wharf shows daily the strength of the financial services and also the crossroads in which the country lives its relationship with the European Union. Banks prefer to stay, but some part of the population does not find the advantages of being there. That’s why Prime Minister David Cameron promised to organize a referendum about this subject.

The political development has been surprising in the recent years: the first coalition government since the WWII, the creation of a far right party (UKIP) with relevant support in an always politically not radical country, the Scottish referendum about its independence from the Kingdom. Now, tories obtained recently the majority to govern alone, the UKIP lost quite a lot support and Scottish nationalists have seen how their wish to be independent disappeared with their surrender in the referendum, although they keep the strength as a party in Scotland.

New Cameron’s cabinet will pass a budget with cuts on the spending side, aligned with the traditional conservative policy. UK emerged strongly from the economic crisis: there has been a hard correction in the housing market, the unemployment is very low (around 5%) and the economic outlook for this and next year proposes a GDP growth higher than 2%. Interest rates will remain low, as the Bank of England promoted exceptional monetary policies as other central banks in the world. A rate hike is only probable from 2017.

What was the stock market evolution in the last five years? Volatility was high, but the evolution was very positive between May 2012 and May 2013. Then the FTSE 100, the main index, has moved between the 6.500 and 7.000 points.

5-year chart of FTSE 100

If we consider the evolution of the returns since 2010, the T-Advisor chart is as follows:

5-year return in FTSE 100

What are the companies with higher 1-year returns in the London Stock Exchange? This is the selection of the ones with returns over 100%. All are related to the services sector: tourism, replacement vehicles, gifts, pharma, distribution and restaurants.

6 best companies in London Stock Exchange

On the other side, the main losers are mainly energy and industrial companies. The companies with 1-year loses over 70% are an investment company, a pub chain, a mobile banking service and three companies linked to energy and mining:

6 worst companies in London Stock Exchange

UK is a country with a strong development in financial economy and that’s why there are several investment opportunities in the stock exchange. T-Advisor has a steady model portfolios with British assets rebalanced every second month. The portfolio has always had strong figures, as we show below:

United Kingdom model portfolio in T-Advisor

UK is a country with lots of opportunities for investors. They have a developed financial branch and markets and the economic environment is positive for this business. The only shadow is the evolution of the relationship with the EU, as it is its main market. A “Brexit” is not very probable, but it can bring uncertainties in the next months… and uncertainties are not very welcome for money.