December is usually the month where investors and asset managers alike take stock of what happened throughout the year, which investments were the leaders and which were the laggards, what lessons are to be learnt from the year gone by, and how, most importantly, to take cue of the current situation and position themselves for the next year to have a cutting edge over the market.

December is characteristically a positive month for risky assets where high yield bonds grind tighter and equity markets have their fair share of upside, but, in the run up to December, markets witnessed more volatility than the norm in the first two months of Q4.

This ultimately kept investment managers, asset managers as well as investors pretty much on their toes. From declining inflation and growth in the Eurozone, to persistent postponement of the US Federal Reserve’s long-awaited rate hike and decline in the price of oil (impacting currencies, emerging markets and companies highly exposed to the commodities sector).

It is therefore safe to say that the volatility and large price movements and fluctuations we have witnessed over the past few weeks, and the market’s eagerness to closely scrutinise incoming economic data is pretty much testament to the fact that markets are in a fragile state.

In the Eurozone, the announcement of a fresh wave of the highly talked about Quantitative Easing (asset purchases) programme has become almost a certainty, or rather necessity, this Thursday as is the market’s expectation of a US Federal Reserve rate hike on December 16, the first such move in 9 years. Markets seem to be positioning for moves by the respective central banks; anything short of market expectations would inevitably result in higher volatility and would distort asset managers’ asset allocations strategical plans for Q1 2016. 

With most of 2015 practically out of the way, investors really want to know what’s in store for 2016 and which are the key themes to look out for.

1) There has been much hype about the ECB’s expected announcement of QE this week, whose aim, in theory, is to propel inflation from current low levels and spur economic growth. The big question in 2016 is whether, in practice, this will ultimately materialise and what impact this could have on the market if not even round 2 of QE in the Eurozone proves to bear its fruits.

2) 16 December is an important day, one where uncertainty is expected to be eliminated as the Fed embarks on its first rate hike. With uncertainty out of the way, markets will be closely monitoring incoming economic data to devise whether the US economy manages to withstand the positive trend in 2015, or whether it eventually succumbs to weaker global growth, possibly from China and Emerging Markets but also from the Eurozone, if QE2 fails to be successful.

3) The first half of 2014 was characterised by the Russia/Ukraine conflict, with the term ‘geo-political’ risk being one of the key themes that year. Geo-political risks seem to have abated for the better part of 2015, but with the recent terrorist attacks in Paris as well as heightened tension between Russia and Turkey in Q415, this theme could very much shape markets, if the situations escalate.

4) The low commodity prices have hurt emerging market economies (which are highly dependent on the price of commodities) and was insufficient to make up for the increase in purchasing power as a result of lower costs, as the slump in commodities was followed by weaker domestic currencies, primarily against the dollar. The slowdown led in part by China has negatively impacted these economies in the latter part of 2015 and we would expect this theme, particularly within the energy sector, to play an important role in global capital markets in 2016. 

This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.