Leading up to the midway point of February it was obvious that financial markets were gripped with fear as ‘risky’ assets such as shares had fallen whilst assets deemed ‘safe’, such as government bonds and gold, were running hot. These movements were being driven by a host of concerns with the spiralling oil price and its impact on oil companies and the banks that have lent to them, China’s slowing economy and the recent ineffectiveness of central banks leading the charge.
Then, as is so often the case, the sell off began to look overdone and share markets around the world started a strong resurgence, which has continued in March. Will global equities hold on to these gains? With some new clouds on the horizon – such as the possibility of the UK voting to leave the European Union in June and the astounding (to us anyway) possibility of a ‘trash talking’ reality TV star taking the White House later in the year – this is a valid question.
The answer lies in whether or not economic conditions and thus corporate earnings improve. There has been some good news in this area of late - particularly in the U.S. where the data is showing that the U.S. consumer is “alive and kicking” which should drive domestic focused companies’ earnings higher. As mentioned above Berkshire Hathaway should prosper in this environment. We observed the release of other encouraging data in Europe, China and Australia. More on this below.
Throughout the month of February we made numerous investments where we saw value. All of these equity (or share) purchases - whether they were made in NZ, Australia or further afield - have increased in value from their purchase price (in local terms at the time of writing) as confidence has flooded back into share markets. As we anticipated in last month’s newsletter fortune has favoured the “cool headed.”
Following is a recap of market movements in February.
The S&P 500 index was down -0.4% for the month. Investors fretted over the outlook for the US economy and the impact of Fed policy on the banking sector. This was set against a wider backdrop of weak global growth with China at the epicentre.
On a positive note US economic growth in the fourth quarter of 2015 was revised upward to 1% from 0.7% last month. This alleviated some fears that the U.S. economy is stalling.
European share markets were lower with the EuroStoxx50 down 3.3% over the month. Data showed that the euro-area economy has maintained its recovery momentum with GDP expanding by 0.3% in the fourth quarter of 2015. This was primarily driven by Germany, its largest economy, which grew at the same pace. Also the eurozone unemployment rate fell to 10.3% in January, the lowest it has been since August 2011.
Even as the euro-area economy showed some resilience, the ECB signalled that it might be prompted to unleash new measures to counter disinflationary pressures from abroad.
A 0.2% gain by the FTSE100 concealed a high level of volatility throughout February, as the turbulent start to 2016 continued. The Bank of England voted 9-0 in favour of no interest rate rise for the first time since July 2015 and cut its forecast for UK economic growth in 2016 from 2.5% to 2.2%. Sentiment then rebounded on the back of more upbeat corporate news flow, a rebound in the oil price, and hopes of further monetary easing in China. Confirmation of the Brexit (Britain to exit or stay in the European Union) referendum date had little impact on an already volatile share market, but did cause further weakness in the British pound which slid to a seven year low versus the US dollar.
Emerging equity markets stabilised in February after overcoming a weak start. Latin America was the best performing region with share market gains being driven by a rebound in commodity prices.
Over the ditch and the ASX200 fell 2.5% in February with worries about the Australian housing market potentially being over-priced dragging bank shares lower.
Back home and the NZ50G rose 1.0% over the month. Interest rates in NZ fell significantly in February making the dividend yield of the NZ share market more attractive in relative terms.