The first month of 2016 can be described as a tale of two halves, with EM weakness and disappointing global economic data leading risky assets lower in the first half, with the second half characterised by some form of market friendly tones and measures by the developed world’s leading central banks.

Equities, currencies, commodities, emerging markets, bonds (both investment grade and high yield) are amongst the key asset classes which had their fair share of volatility in 2015, but few would have envisaged what the first couple of weeks of 2016 would have in store for investors.

In the sharp reverse in risk aversion, markets witnessed a marked flight to high quality, lower risk assets, with investment grade bonds (particularly sovereign bonds) benefitting from healthy price gains. Economic data was nothing to write home about either.

Eurozone inflationary data remained unchanged Chinese PMI and data relating to economic activity resumed their downward trajectory. The last couple of months also indicate that economic data and conditions in the US and in Europe deteriorated. US consumers consumed less than forecast in December, with producer prices registering a decline. This has dealt a blow not only to inflationary expectations but also raises questions as to the trajectory of interest rates.

However, mid-way through the month, ECB head Mario Draghi acknowledged that market conditions deteriorated since the December meeting, making particular reference to the fact that the threats to the single currency region’s recovery have escalated, as fears that a persistent slowdown in China are expected to bring global economic growth to a halt.

Furthermore, he stated that interest rates are expected to remain at present or lower levels for an extended period of time, opining that “downside risks have increased again amid heightened uncertainties about emerging-market growth prospects,” leading markets to believe that the ECB would be ready to act should current market conditions persist.

The Chairperson’s tone in the inaugural Fed meeting of 2016 proved to be more dovish than expected, with the likelihood of a March rate hike being pushed further down the road, whilst towards the end of the month, the Bank of Japan surprised markets by cutting rates on excess reserves to -0.1% in the latest global dovish central bank move. This dovishness in the latter part of the month sent risky assets higher, helping them partially recoup their losses in the beginning of the month. In this vein, the European and US HY bond markets dropped by 0.91% and 1.24%.

At these particular crossroads, investors need to remain aware and alert that there has been no significant change in fundamentals, neither expectations of such change in the imminent future. This time round, investors would not be at fault to tread with an element of caution and build exposures to those sectors which, in the short term, could withstand market turmoil.

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.