What a start to 2016! Very few would have predicted such a dramatic opening to the year as the global stock markets manifested one of the worst starts to a year in history. A plunge in the Chinese market sparked fears around the world of another stock market meltdown and since then volatility gained momentum. But what was the real cause of this? Should investors be worried?
To begin with, China matters more today than before, as it has established itself as the world’s second largest economy (after the US). The region is moving from a manufacturing-led to a consumer-led economy and this transition has created anxiety and uncertainty among investors.
Volatility creates opportunities
While weaker than expected, Chinese manufacturing data at the start of the year was the cause for the markets to open in red zone. This was amplified by the fact that policymakers in China have control over the markets through what are called ‘circuit breakers’.
This mechanism automatically suspends trading activities in the event of a sharp decline of more than seven per cent. Within the space of a few days, this device was called to action twice, causing further distress among investors as it heightened fears of a potential meltdown. These artificial circuit breakers have since been suspended.
A brief look back at 2015
The European Central Bank (ECB) implemented historic quantitative easing measures during the first half of 2015. On the currency side, the Swiss National Bank surprised investors when it dropped the franc’s peg to the euro at the beginning of 2015, while the euro showed remarkable resilience after concerns towards the end of the first quarter that it may fall below parity with the US dollar.
Uncertainty over the ability of Greece to service debt commitments continued to unsettle investors, while the potential exit of Britain from the EU also entered investors’ radar after a surprisingly convincing Conservative Party victory in the UK general election.
On the corporate side, Volkswagen made headlines with one of the biggest corporate scandals of recent times following reports on deceitful emission devices.
During the first part of 2015, you could say that stocks rallied ‘unwillingly’, as investors viewed equities as the ‘least bad’ option. This rally started losing pace towards the middle of 2015. Oil remained unstable and the US dollar continued to provide a safe haven for investors.
Moving east, despite actions by China’s policymakers, weaker than expected manufacturing data continued to dominate market sentiment, while the decline in commodity prices showed no sign of abating. Volatility remained high as the much-awaited announcement by the US Federal Reserve to raise interest rates for the first time in nearly a decade became a reality.
2016 – What’s next?
The turmoil in China inevitably has a spillover effect on commodities as well as neighbouring and global economies. We expect 2016 to be a continuation of last year, as the biggest movements that characterised 2015 (i.e. China and energy prices) have made their presence felt this January.
Fundamentally, a weaker oil price can be good for business, companies and, ultimately, the consumer. However, this is generally the case when the market price is ‘demand driven’. The instability levels within the energy sector are ‘supply driven’ and the lack of stabilisation and deflationary fears are causing further tension.
Traditionally, the US sets the pace for global markets and its economy at present seems to be in reasonably good shape. GDP growth is expected between two to three per cent and low unemployment figures (under five per cent) are expected to persist.
That said, challenges remain. Marginal interest rate rises in the US, uncertainties in emerging markets and the oil price instability (of late hitting a 12-year low) will continue to dominate the outlook. These, coupled with unrest in the Middle East, the referendum on the UK/EU future relationship and the US presidential election are all events that will keep us busy throughout 2016.
Volatility creates opportunities. With interest rates at historical lows, suppressed yields on bonds and the current levels at which the equity markets are trading, investors must be ‘selective’ and ‘proactive’ in their approach this year.
Strategic asset allocation and diversification remain key. Nonetheless, investment portfolios should also reflect the realities and conditions financial markets face today. During this period of uncertainty, ‘wealth protection’ becomes more important than ‘return on capital’.
This is an opportune time to review your investment portfolio to ensure it is appropriately positioned and diversified to minimise risk as well as to take advantage of the investment opportunities presenting themselves. If in any doubt that this is the case, or you would like to seek a second opinion, it is important you seek professional advice from a trusted wealth manager.
www.blevinsfranks.com
Kevin Cassar is a private wealth manager, Blevins Franks.