The final quarter of 2015 ended the year on a positive note, with many markets reversing the declines they suffered in the preceding period. However, 2015 was a tumultuous year, characterized by diverging regional economic fortunes and policy trends, where positive currency-adjusted returns were difficult to achieve.
In regional terms, the best performing equity markets were those of Europe and Japan. In both of these markets monetary policy has remained highly accommodative, supporting asset prices. Furthermore, the European economy has strengthened over the course of the year, while Japanese stocks have benefitted from the Japanese government’s focus on improving corporate governance. Both regions have also seen their competitiveness boosted by large currency devaluations in recent years.
US equities performed well during the quarter, as positive economic data and optimistic rhetoric from members of the Federal Open Market Committee (‘FOMC’) supported investor sentiment. The first increase in US interest rates since 2006 passed without any major incident, as the Federal Reserve (‘Fed’) managed to convince the market that it is willing, and able, to support the country’s economic recovery.
Within global equity markets there has been a large divergence in performance between the various sectors, both over the quarter and throughout 2015 as a whole (Figure 1). Energy and resource companies have been the clear laggards, with commodity prices (including oil) suffering declines against a backdrop of slowing global growth and structural oversupply.
Given this dynamic, it is somewhat unsurprising that the Emerging Markets, which hold relatively large exposure to the resource sectors, have been the worst performers. Likewise, that the globally-exposed, resource-heavy FTSE 100 Index has underperformed the more UK-focused FTSE 250 Index. The large decline in oil prices also weighed on the bonds of US energy companies, particularly in the high yield sector, and this exaggerated a rise in broader measures of corporate bond market yields.
In the sovereign bond markets, short-dated US treasury yields rose as the Fed raised interest rates. However, the yields of longer-term issues saw relatively small increases, reflecting the fact that growth and inflation expectations remain low. European sovereign bond yields generally experienced small declines as the European Central Bank (‘ECB’) increased its stimulus measures. However, this masked underlying volatility in markets such as Spain and Portugal, where general elections ended indecisively and political uncertainty rose. Elsewhere, Emerging Market sovereign bonds came under pressure, particularly those of countries that have little protection from external shocks, such as that provided by the large declines in commodity prices.
In general, we expect the global economy to improve in 2016. The divergence in regional economic prospects should remain in focus for some time, while policy is likely to remain supportive amid benign inflation. We continue to favour equities over bonds, as equity valuations are not at extreme levels and given the prospect of forthcoming rate rises. We also hold some concerns over liquidity in the corporate bond market, particularly in regard to high-yielding issues.
Regionally, we continue to favour economies that are exposed to reflationary policy backdrops, such as Europe and Japan. We are also positive on the US, which we judge to be the strongest major developed economy coming into 2016. However, we believe that areas reliant on the commodity dynamic are likely to remain under pressure for some time.
Equity Performance by sector, Q4 and 2015
Figure 1: Global equity market performance by sector.
(Source: Thomson Reuters Datastream)
Market performance, Q4 and 2015
WMA: Wealth Managers Association Index
TR: indicates total return index (includes interest, capital gains, dividends and distributions)
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