The Brent crude price fell significantly during the final months of the year. During the fourth quarter alone, the oil price fell from $94.7 per barrel to $57.3, a fall of 39%. Since the middle of June 2014 the oil price has halved. The impact was lessened somewhat for UK-based investors due to Sterling weakness. The oil price fell sharply as it became clear that OPEC were not going to cut production in the face of growing US oil production, and slower demand from China and Europe.
Despite the stronger US Dollar, the gold price was fairly resilient during the final quarter, falling just 1.9% to $1185/oz. Other commodities such as Copper, Iron Ore and Zinc were weak reflecting Chinese economic growth concerns.
The UK stock market (FTSE All-Share Index, +0.6%) generated a marginally positive return during the final quarter of the year. In local currency terms, this was a disappointing finish to the year relative to other regional equity markets. The FTSE World ex UK Index rose 3.3%, with Japanese (MSCI Japan Index) and the American (S&P500 Index) equities leading the way, rising 6.7% and 4.9% respectively. In local currency terms, Europe was the only major regional equity block to produce a negative return during the period (FTSEurofirst Index, -0.5%). Some of the relative underperformance of the UK equity market can be ascribed to the higher weight that the basic materials sector has within the index. This sector performed particularly poorly as a result of the sharp falls witnessed by some commodity prices. Sentiment has also been impacted by the upcoming general election in May, and the realisation that the outcome has many different potential permutations given the poor showing of the major political parties in opinion polls and the rise of UKIP and the SNP.
US Dollar strength and Japanese Yen weakness were notable features during the last three months of the year. For UK-based investors, this resulted in a much enhanced return for US equities (S&P500 Index, +9.1%) and a significantly diminished return for Japanese equities (MSCI Japan Index, +1.5%). The US Dollar benefited from continued robust economic data releases as well as the conclusion of the latest round of Quantitative Easing. The Japanese Yen suffered as a result of the snap election that Prime Minister Abe called, and won, in Japan, which has had the result of endorsing his mandate to continue to weaken the Yen as one element of his plan to revitalise the Japanese economy.
Gilt returns were strong (FTSE Gilts All Stocks Index, +6.3%) during the fourth quarter. By the end of December, the 10-year gilt yield had fallen to just 1.76%, the low for the year, having started 2014 at just over 3.0%. This resulted in a total return for the year of 13.9% and compares with the 1.2% return over the year for UK equities (FTSE All-Share Index). Gilts were in demand because inflation expectations continue to fall and the asset class also benefited from its ‘safe haven’ perception.
Investment grade debt performed strongly riding on the back of the strong demand for ‘safe haven’ government debt. However more speculative levels of debt (high yield) suffered as investors demanded a higher premium to hold these assets. This was particularly pronounced in the United States where a significant proportion of high yield debt issued is backed by oil exploration and production companies.
The recovery in the UK commercial property sector continued, with the IPD UK All-Property Index returning 2.8% during the final quarter of 2014. Over the calendar year 2014, the index has returned 17.5% making it one of the stronger-returning asset classes.