The Lowdown on Markets to 15th January
World Markets at a Glance
In this week’s issue
- Sadly 2015 became a year of challenges for many of the global equity markets.
- Commodities delivered their fifth consecutive year of negative price returns.
- The developed markets out-performed the developing by a clear margin.
- Government bonds and cash became safe haven asset classes as equity market faltered.
- In the FX market “currency wars” gathered momentum as the Chinese devalued the Yuan.
- The start of 2016 see’s risk appetite plummet, and markets fall, but a relief rally is overdue.
“Stock markets continue to fall throughout 2016 as risk appetite falters”
Sadly 2015 became a year of challenges for global markets and more importantly for investors who were left wondering what risks and opportunities lie ahead and what impact on returns that might have for 2016. Indeed, last year was a very difficult year for most risk assets as global equity markets experienced periods of extreme volatility and uncertainty as the likes of the emerging markets and commodities suffered badly. In fact, commodities delivered their fifth consecutive year of negative price returns with the price of crude oil falling dramatically throughout the year.
“There were some extreme levels of differing performances within many of the domestic equity market indices, for example”
Admittedly, there were some extreme levels of differing performances within many of the domestic equity market indices, for example, the FTSE 250 and FTSE Small Cap indices vastly out-performed the FTSE 100 Index due to its weighing towards oil and commodity related stocks. Unquestionably having a larger exposure towards the UK consumer services, discretionary and technology sectors was very beneficial especially given the excessive fall that we saw in the prices of commodities and crude oil.
Likewise, in the US the Nasdaq Composite and Nasdaq 100 out-performed the Dow Jones, S&P 500 and Russell 200 indices by a considerable margin. Once again, this was mainly due to the make-up of the indices with those heavily weighted towards oil and basic materials producing inferior numbers to those that had a much larger exposure towards the consumer and healthcare stocks. Also we saw that investors favoured growth over value stocks, which in turn, delivered a vast difference in overall performance.
“Another important subject that asset allocators had to address was that of central bank policy, and intervention”
Similarly, another important subject that asset allocators had to address was that of central bank policy, and intervention, certainly, the divergence in regional returns throughout the year was quite extreme and it paid to favour those markets where monetary policy was the loosest. This meant that European and Japanese stock prices were assisted by their current central bank policies; however, a mid-year pull back did cause some concerns amongst investors. Also it was imperative that you kept a watchful eye on the currency markets as there was a big disbursement in performance between local market and client’s domestic currencies.
In summary, 2015 began in a fairly bullish mood, however, the markets began to suffer from early May onwards as numerous issues began to hit sentiment, Grexit risks, Chinese hard landing fears, currency wars, the slump in commodity prices, especially crude oil, the US Federal Reserve Banks nervous stance on monetary tightening, Brazils corruption scandal, and of course, the geo-political risks created by the likes of the Ukraine, Russia and the Middle East, this all weighed very heavily on the markets, investor sentiment and eventually the risk appetite from global investor’s.
Clearly, a number of these problematic issues have now flowed into 2016 and created a downward spiral in the global equity markets; this has subsequently led us to copious amounts of downward pressure being applied to risk assets over the past fifteen days, and in some cases, has now led to a number of indices falling into “bear market territory”. Inevitability, in volatile periods such as these, when high levels of anxiety seem to be taking over, it is worth remembering that “the trend is your friend”, and learning the lessons from 2008 and 2011, therefore it might be sensible to administer some caution at this current time whilst things unwind.
“There is still a risk that the US economy might roll over and experience a mild recession”
Desynchronised global growth, a stronger US dollar, the US Presidential election, the Brexit vote and further disruptions created by the Chinese authorities, as they battle to try and stabilise the Chinese economy, are all likely to play an active role in how the markets might pan out this year, also there is still a risk that the US economy might roll over an experience a mild recession. Other issues that are likely to remain in the headlines over the coming months is how far will the oil price fall and will the continued collapse in commodity prices finally bottom out.
Obviously, stock markets have had a dreadful start to the year with plenty of perma bears around predicting further falls to come, indeed, we are likely to experience a few more difficult weeks ahead as further disappointing economic data is announced, none-the-less, it still makes more sense for global investors to support equity markets over core fixed income whilst focusing on the developed markets over the developing, or though saying that there is now some deep value appearing in the emerging markets.
“Global investors must be mindful that 2016 is likely to be a stock pickers market”
Furthermore, given that markets are now moving in tandem, and on average are down around 8 per cent for the year, with China down 18 per cent, and crude oil collapsing a further 20 per cent, we are likely to experience a relief rally sometime soon. Conversely, global investors must be mindful that 2016 is likely to be a stock pickers market, with sectors and themes playing a very active part within your asset allocation. Indeed, similar to 2015 it will be very important to own the quality end of the market given that these companies tend to have strong balance sheets, generating cash flow and increasing their dividends which will be very important on a total return basis.
The likelihood is that central banks will continue to play an active part in the direction of global equity markets as we experience divergence between the leading banks. Whilst the Federal Reserve Bank attempt to raise interest rates throughout the year, the likelihood, is that the European Central Bank and Bank of Japan will implement further quantitative easing whilst The Peoples Bank of China devalue their currency in an attempt to stimulate their economy. In the UK, the prospects are that the Bank of England will hold rates at their current level until the latter end of 2016.
And so in summary, we still feel that the growth outlook for the developed markets remains quite positive, although modest, and that the outlook for global growth is being harmed mainly by the outlook for China. Clearly, sentiment towards China appears rather bleak; however, it may improve as the Chinese announce further monetary policy initiatives. In terms of the bond markets we feel that credit spreads are starting to price in too much bad news, therefore, do not be surprised if we experience a relief rally over the coming weeks. However, in the meantime investors should still remain cautious especially until we see a floor in the oil price or announcements of better economic data.
Peter Lowman, Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed.
Investment Quorum is authorised and regulated by the Financial Conduct Authority .