Market Perspectives - Quarter 4 2015


• Signs of recovery after the sharp market correction in the third quarter, when fears about global growth and the outlook for the Chinese economy dominated the sentiment.

• Federal Reserve (Fed) increased interest rates after almost a decade of monetary loosening, leaving no significant effect on equity markets as investors broadly anticipated the hike.

• Policy divergence – whilst in the US we finally see the end of quantitative easing (QE), some other central banks like European Central Bank (ECB), Bank of Japan (BoJ) and the People’s Bank of China (PBoC) remain firm in their accommodating measures to stimulate the economy.

• Renewed weakness of commodities, crude oil in particular, coupled with fresh concerns about the outlook on the Chinese economy.

Market Commentary Q4
The market went through recovery after the sharp correction in Q3 and global equities delivered positive returns for the fourth quarter, despite generally poor performance in December.
Overall US equities recorded decent returns over the quarter. Fed increased rates for the first time since 2006 on the back of strong domestic macroeconomic data. The US economy seems to be in good shape with the unemployment rate being at a seven-year lower of 5% and increased consumer confidence. Whilst this represents the end of QE programme in the US, other major monetary authorities kept the loosening conditions and this is where we see the divergence of policies between US on the one hand and Europe, Japan, China, etc. on the other hand.
The announcement of ECB in early December left the market disappointed, as it hadn’t expanded its QE programme. The ECB cut the deposit rate by the minimum amount expected, extended the length of QE program by six months until March 2017, when the market was looking for 12 months, and expanded the pool of assets without increasing the size of monthly purchases. This led European stocks down in December but they recorded solid returns overall in the quarter. Economic data was largely encouraging, and purchasing managers’ index (PMI) for the fourth quarter was the strongest for the Eurozone in four and a half years.

Japan became the best performing equity market over the quarter rebounding sharply in October after the correction in August and September.

 Commodities continued their downward trend, mainly with the renewed weakness of crude oil price and fresh concerns about the outlook for the Chinese economy. In light of this plus stronger dollar and geopolitical tensions, emerging market equities underperformed relative to the developed markets, but still managed to increase in value over the period.

Market Outlook
The very first days of 2016 have confirmed concerns about the Chinese economy when the main Shanghai Composite Index incurred significant losses forcing PBoC to devalue yuan and impose circuit breakers which try to avert panic in markets by putting temporary halts in trading. China still fills the headlines and investors are not sure where the stock market will head this year. Our long term view is that China has a lot of potential even though it is clearly slowing down and changing towards consumer oriented, domestically focused economy. That said, in 2016 we expect consumer and service sectors to perform better than the industrial sector. The GDP growth rate in 2016 will be just under 7%, which is still double the global growth rate; this rate is however expected to drop to around 5% by 2020. Due to the shift in the investor sentiment and large uncertainty regarding this market for now we would avoid funds that have larger exposure to China but would certainly be supportive of funds that pick high quality companies (mainly listed on the Hong Kong Stock Exchange), whose valuations look more attractive now after the re-rating.

It’s been a rough five years for emerging market stocks in general, and their total return was negative over that span. The continued growth slowdown reflects several factors, including lower commodity prices (oil just hit a 12 year low), stronger US dollar and tighter external financial conditions, rebalancing in China, and geopolitical conflicts. A rebound in activity in a number of distressed economies is expected to result in a pickup in growth in 2016. Corporate valuations in emerging markets are at around 40% discount relative to their developed counterparts. Once this sector starts recovering we feel there will be outstanding investment opportunities; we would look at the managers who are unconstrained and deploy a highly active approach as not all emerging markets are the same and index investing is less popular here in our view.

In terms of our positioning in the current investment climate, in the equity space we would favour Europe. EU companies trade at a level that is about 8% cheaper than US stocks. The ECB will continue with the asset purchase programme and that coupled with the weakening Euro and low oil price is poised to help the region’s businesses. The main equity index Stoxx Europe 600 is at the lowest level since January 2015 and according to Goldman Sachs there is potential to deliver double digit returns this year, this may be a little optimistic but the sentiment holds true. Financial, staples and health care companies should be favoured as they are more linked to economic recovery and may be more shielded from the storm in global equities. The “supercycle” for bonds is largely over, as the unconventional policies that have kept it alive since the financial crisis are running out. There is only a limited place for bonds and we would prefer corporate credit to government bonds; otherwise we would look to replace this section of the portfolio with absolute return funds, which serve as a good proxy. Some of these long/ short funds have low correlation with the major market indices and could deliver decent returns while being liquid.

In summary, many uncertainties of 2015 will be carried over to 2016, in particular the continued volatility in developed and especially emerging markets equities, as well as dipping commodity prices. Equities should still remain the main alpha generator in our client portfolios and we are focused on particular regions such as Europe. In unpredictable times like now we will look to expand more into alternative space.

Region/ Asset Class


To December 31st 2015




Global equity

MSCI World





MSCI Europe





Nikkei 225




Emerging markets





United States

S&P 500




United Kingdom

FTSE All Share




Global bond

Barclays Global Aggregate









*Gross return, local currency. Source: FE Analytics.