The year 2014 saw some positive developments for the economies of US and India and it saw stagnation in Europe and Japan while China continued to struggle with economic growth that was comparable to levels of 1999. The lower oil prices is expected to revive GDP growth for the Global economy in the year 2015. The equity performance across global markets was mixed with some markets registering record high levels in the year 2014 and some of them struggling to grow as per expectation. Expected rise in interest rates and the decision to stop quantitative easing by the Federal Reserve pushed foreign investors to seek marginal global risk aversion. In the emerging market economies, India showed exceptional performance in its equity and debt markets propelled by political stability at the Centre.
The Dow Jones Industrial Average, the NASDAQ and the S&P 500 index rose 12.13%, 17.12% and 15.77% respectively in the last one year. The indices reached record high levels at the end of the year on improvement in the fundamentals of the US economy. Strong economic footing helped companies in the US to report strong growth in revenues and rise in profitability in the last one year.
The US Generic Government 10 year bond yield fell 79 basis points from 3.03% to 2.24% in the last one year as the Federal Reserve ended the Quantitative Easing in the form of bond buyback in the month of October 2014. The Federal Reserve is expected to hike interest rates in the year 2015 as and when the economic conditions warrant it to do so. The unemployment rate declined from 6.7% in the month of January 2014 to 5.8% in the month of November 2014. The inflation rate fluctuated in the range of 1.1% to 2.1% in the year 2014 but continues to remain below the target of 2% for the US economy. The Fed is of the view that it would hike interest rates (currently at 0% to 0.25%) to higher levels once the inflation target is breached on a consistent basis.
The Sensex and the Nifty rose 31.65% and 32.77% respectively in the last one year. The indices have reached record high levels in the year 2014 and are expected to scale new peaks on account of improvement in the macroeconomic conditions that would help grow the corporate earnings in the year 2015. The inflation rate declined from 8.79% in January 2014 to 4.38% in the month of November 2014. The interest rates are expected to be cut by the RBI in the year 2015 as inflation measured by the Consumer Price Index (CPI) has shown sharp decline. The 10 year Government Bond yield has fallen by 84 basis points to 7.98% from the levels of 8.84% in the year 2014 due to improvement in the economic conditions with a newly elected stable BJP led NDA Government at the Centre.
Political stability led the rise in the levels for the Sensex and the Nifty as the Bharatiya Janata Party (BJP) alone won 288 seats in the Lok Sabha elections of 2014 that led Mr.Narendra Modi to become the Prime Minister of India.
Japanese 10 Year Government Bond yield fell by 41 basis points to 0.33%. The economic indicators pointed to a slowdown in the GDP growth to -1.2% annually in the third quarter of 2014 from levels of 2.9% reported in the first quarter of the calendar year 2014. Monetary policy was kept unchanged at zero percent interest rates along with support in the form of quantitative easing by way of bond purchases for the Japanese economy.
The Nikkei index rose 11.42% on a year on year basis following the actions of the Bank of Japan.
Stagnation in growth in the Euro Area showed on the performance of the main indices of FTSE and DAX which remained flat on a year on year basis in 2014. The European Central Bank left its benchmark interest rate unchanged at a record low 0.05% in the year 2014. Policymakers indicated that stimulus measures would be implemented if necessary.
The People´s Bank of China decided to cut its benchmark one-year lending rate by 40 bps to 5.6% in the month of November 2014, which was the first rate cut in more than two years as the economy slowed down. In the third quarter of 2014, China’s GDP expanded 7.3% on a year-on-year basis, slumping to a five-year low. The slowdown was driven by lower property investment, dwindling credit growth and weakening industrial production. The annual inflation rate slowed to 1.4% in the month of November 2014 down from 1.6% increase in the previous month, touching the lowest level since January 2010. Lower GDP growth coupled with decline in inflation levels to multi year lows prompted the Central Bank to cut interest rates to spur growth in the economy. The Shanghai Composite Index rose 56.34% in the year 2014 where most of the gains to the extent of 40% came in the last three months of the calendar year.
In the commodities space Brent Crude oil declined from levels of USD 116 per barrel to a low of USD 58 per barrel in the year 2014 due to excess supply ( due to shale oil revolution in the US) and decline in demand due to slowdown in growth for the Global economy. OPEC in its recent meeting decided to keep the production of crude oil from its oil producing regions unchanged.
Gold declined 18% from levels of USD 1392 per Oz in the month of March 2014 to USD 1132 per Oz. in the month of November 2014. Rise in the levels of equity indices across the globe led to the decline in the price of Gold as the metal is seen as a safe haven during times of economic uncertainty. Gold prices remained flat on a year on year basis.
The US Dollar strengthened against major currencies in the World mainly on account of slowdown in economic growth in countries like China, Japan and the Euro Area along with positive economic developments in the US. The USD appreciated 11% and 15% against the Euro and Japanese Yen respectively in the year 2014. The USD remained flat on a year on year basis against the Indian Rupee as positive economic developments in the Indian economy led to an inflow of funds in debt and equity market during 2014. The Dollar index that tracks the strength of the US Dollar against a basket of foreign currencies rose 12.5% to levels of 90 in the year 2014.
The Russian Ruble depreciated 79% against the USD as the Central Bank of the Russia hiked interest rates from 5% to 17% in the year 2014. Interest Rate in Russia averaged 6.61% from 2003 until 2014, reaching an all-time high of 17% in December of 2014 and a record low of 5% in June of 2010. Interest rates were hiked to stem the fall in the value of the Ruble after more than USD 80 billion was spent from its reserves to stop the selloff. Inflation also hardened to levels of 9.1% in the month of November 2014 from levels of 6.1% in the month of January 2014. The 10 Year Government Bond yields also rose to levels of 13.79% in the month of December 2014 as a result. The Russian stock market index viz. MICEX remained flat on a year on year basis.
Table : Monthly Market Movement