Global stock markets rise amid optimism over US inflation slowdown

Global stock markets rose on Friday, still riding the positive US inflation data from earlier this week as investors mull the size of the next interest rate move by the US Federal Reserve.

Market sentiment has been buoyed by US Labour Department data this week showing a slowdown in consumer and producer prices in July following a series of interest rate hikes by the Fed.

On Wall Street, the Dow rose 1.27 per cent, while the S&P 500 gained 1.73 per cent. The tech-heavy Nasdaq Composite added more than 2 per cent.

The S&P 500 is up 17.7 per cent from a mid-June low, with the latest gains coming from data this week showing a slower-than-expected rise in the consumer price index and a surprise drop in producer prices last month.

For the week, the S&P 500 added 3.25 per cent, the Dow rose 2.92 per cent and the Nasdaq gained 3.8 per cent. The S&P 500 and Nasdaq notched their fourth straight week of gains.

“This week has been all about the inflation data and, frankly, it could be the dominant force in the markets now right up until the Jackson Hole symposium,” said OANDA analyst Craig Erlam, referring to a meeting of central bankers from around the world at the end of August.

“The fact that inflation not only decelerated in the US, but at a faster pace than the consensus forecasts was a double win and risk assets are feeling the benefit,” Mr Erlam said.

In Europe, London's FTSE 100 index closed 0.5 per cent higher, Frankfurt's DAX gained 0.7 per cent and Paris's CAC 40 index added 0.1 per cent.

Earlier in Asia, Tokyo's Nikkei 225 settled up 2.6 per cent and Hong Kong's Hang Seng Index rose 0.5 per cent, but the Shanghai Composite declined 0.2 per cent.

But whether the improved data hearkens a pivot in Fed policy anytime soon remains an open question.

The markets have been concerned that, after two consecutive Fed increases in borrowing costs of three-quarters of a percentage point, further hikes of a similar magnitude could choke off economic recovery.

Fed officials have lined up to try to defuse speculation that the cycle of monetary policy tightening could be coming to an end anytime soon.

Jack Ablin, chief investment officer of Cresset Asset Management, attributed the gains to a “sentiment shift” that he cautioned may be excessive given the limited evidence to date.

“It's just momentum and positivity that's driving the market higher,” Mr Ablin said. “It seems like some of the bullish investors may be getting ahead of themselves.”

UBS Financial Services analyst Terri Jacobsen said she expected “headwinds for the markets until we get some resolution on how far the Fed is going to go and how long they're going to raise interest rates”.

Gold prices advanced, helped by a drop in US Treasury yields, and setting bullion on path for a fourth straight week of gains.

Spot gold added 0.7 per cent to $1,801.76 an ounce. US gold futures gained 0.56 per cent to $1,799.70 an ounce.

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”