In the year 2015, developed economies stock markets have outperformed the emerging economies stock markets while bonds too have outperformed many emerging market bonds. Will the trend continue in 2016? Developed economies gained from cheap Central Bank liquidity with Fed, ECB and Bank of Japan keeping policy rates at all time lows and ECB and Bank of Japan pumping in USD 125 billion of liquitiy into the system every month through bond purhases. Low oil prices too helped the developed economies.
Emerging economies were hit by falling commodity prices, Fed rate hike expectations and weak China growth and Yuan devaluation. The Fed hiked rates for the first time since 2007 in December 2015 and has signalled for more hikes in 2016. The USD was the best performer amongst global currencies on the back of Fed rate hikes and its policy divergence with most of the global central banks.
Going forward, the performance of markets will be country specific rather than category specific. Amongst emerging markets, India looks to be a relatively better bet given that low oil prices help the country contain its budget and current account deficit and domestic consumption is given a boost from falling interest rates and falling inflation expectations. RBI cut rates by 125bps in 2015 while anchoring inflation expectations at levels of 5% to 6%.
2015 saw muted performance in all markets
The later part of the year 2015 witnessed sudden spike in market volatility amid growing policy divergence among global central bank as U.S. Fed which was expected to end its loose monetary policy, which it did in its last FOMC meet of 2015, whereas ECB and BoJ are giving strong signals to enhance their stimulus program to boost economic growth and fight deflation. Now the speculation over Fed rate hike is over which has taken out the uncertainty from the global financial market.
The Dow Jones Industrial Average declined by 1.46% on yearly basis whereas NASDAQ rose by 6.92% and the S&P 500 index was marginally down by 0.1%. The indices reacted positively after the U.S. Fed rate hike, which was supported by upbeat U.S. economic data suggesting that the U.S. economy is traversing a recovery path. The U.S. Generic Government 10-year bond yield rose by 15 basis points from 2.17% to 2.32% in the last one year.
European stock markets were largely mixed in a one year period as German index DAX rose by 10.76% whereas U.K. FTSE index declined by 3.55%. German stocks outperformed its European and global peers in 2015. DAX is expected to gain in 2016 on optimism that low oil prices and a weak Euro will benefit German companies. ECB quantitative easing measures this year has given boost to the companies in Germany, whereas rout triggered by China’s surprise currency devaluation and Volkswagen AG’s emissions scandal brought DAX under heavy selling pressure from highs seen in the early part of the year but since September low, the DAX has recouped about half those losses.
Euro weakened against USD in 2015 on the building up of policy divergence. ECB extended its monetary stimulus program amidst persistently weak economic growth, risk of deflation and escalating geopolitical tensions. Euro depreciated by 10.08% against USD in a one year period.
The Sensex and the Nifty declined by 3.86% and 4.86% respectively in the last one year. The low global commodity prices, has helped the country’s economy by easing pressure on budget deficit and current account deficit. In 2015 when some emerging markets saw very high volatility the Indian equity market held up reasonably well. While markets like Brazil and South Africa saw double-digit losses, the Indian market remained relatively stable and continued to be a target for global portfolio managers.
The Reserve bank of India succeeded in keeping the rupee relatively stable against the US dollar at a time when most emerging market currencies saw a steep decline in their value. Indian Rupee on yearly basis depreciated by 4.53% against USD.
The Nikkei index rose 9.07% on a year on year basis following the actions of the Bank of Japan and on expectations of further extending the stimulus program to boost the ailing economy. On monthly basis Nikkei declined by 3.61% after BoJ in its latest monetary policy meet failed to live up to the market expectations. The BoJ resisted increasing the bond purchase program from the existing level of 80 trillion Yen. There was a slight change in the easing policy. The BoJ set up a program to buy ETFs worth 300 billion Yen annually. The BOJ also extended the average maturity of bond purchases to 7- 12 years from 7-10 years.
The Shanghai Composite Index continued to be the highest gainer among emerging economies, the index rose by 12.44% in the year 2015. The gain came despite the fact that Chinese economy is facing a slowdown as China’s Exports fell 6.8% in November 2015 from 6.9% fall seen in October 2015. Imports fell 8.7% in November from 18.8% fall in October. Trade surplus for November was USD 54.1 billion from October levels of USD 61.64 billion. China manufacturing index contracted at the fastest rate in more than three years in November, the fourth consecutive month of contraction. China’s Central Bank, the PBOC (People’s Bank of China) has cut rates and eased reserve requirements of banks for growth in the economy and is likely to ease policy further to lend support for the economy.
In the commodities space Brent Crude oil declined from levels of USD 57.33 per barrel to a low of USD 37.47 per barrel in the year 2015 as excess supply and muted demand continued to be the reason to keep crude oil prices at low levels. On yearly basis Brent crude declined by 34.64% and Gold declined by 24.7%. Reuters CRB Index, which tracks 19 commodities prices, has declined by 24.04% on yearly basis.