Investors’ champagne glasses were left half raised following the New Year as markets in 2016 began in the red. A global slowdown is gaining credibility following supportive data out of China and the US. It seems the energy sector is continuing to be a drag on a global economic recovery.
European equities rebounded today following yesterday’s sharp selloff, sparked by uninviting Chinese and US manufacturing data. European government bond yields fared lower, however as Eurozone CPI data disappointed by coming in below expectations at 0.2 per cent.
Although positive fundamentals seem to be on the rise, with improvements seen in German and Spanish unemployment figures, low commodity prices seem to be persistently keeping inflation expectations from lifting off.
With global market fundamentals usually responding with a lag effect to economic repercussions, the longer commodity prices remain at a low, the higher the risk of default rates on a number of high yielding corporates are set to be in 2016.
As I mentioned a few weeks ago, emerging markets are set to bear the brunt of persistent low commodity prices as the majority of companies are commodities based. Having already suffered high capital outflows as a result of a stronger USD, emerging markets face a spike in borrowing costs and consequently a further devaluation of local currencies.
Repercussions may spill over into recovering developed economies if EM central banks sell their foreign exchange reserves to balance out their books and resultant current account deficits.
A commodity to benefit from such a development could be gold. The precious metal is known to be negatively correlated to economic growth. With a stagnant eurozone and slowing Chinese and US economies, investors may want to start thinking of splitting their eggs into a new basket.
Gold has dropped over 17 per cent since January last year, amidst the speculation of monetary measures that occurred in 2015 such as the QE extension by the ECB and monetary tightening by the US Federal Reserve.
However as expectations disappointed and surprise measures undertaken, by the likes of the People’s Bank of China in 2015 to further stimulate the economy, Investors got a good hint that world growth was struggling. Should a slowdown persist and commodity prices continue to be a drag on inflation expectations, Gold prices have upside potential.
2016 should be a year to rethink and identify new possible strategies to generate profits. The VIX volatility index doesn’t seem like a bad shout to be cheekily exposed to as the economy rides the waves, however the predominant focus will be to keep a close eye on corporate fundamentals.
Strategies such as a Bottom-up investing approach will have the upper hand on top-down approaches so long as volatility persists.
Disclaimer: This article was issued by Mathieu Ganado, Junior 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. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.