Last month global equities (or shares) had their worst January since the depths of the Global Financial Crisis (GFC) with the MSCI All Country World Index falling 5.5% (in local currency). Re-kindled concerns over global growth and the health of China’s economy, coupled with fresh lows in commodity prices led to a rapid deterioration in investor sentiment. Given the market’s unanimous “risk off’ behaviour one could be forgiven for thinking that a global recession was around the corner. However, despite the various clouds on the horizon (which by no means are we taking lightly) we don’t subscribe to this theory and instead believe that we are likely to see a continuation of underwhelming modest growth – a theme that has been in place since the GFC. Should we see the U.S. consumer start to “roll over” we would have cause to reconsider our view.
Given the strength we have seen in the U.S. in employment, real wage growth and consumer confidence we ascribe a low probability to this eventuality.
In our December newsletter we spoke about our expectation for another year of heightened volatility. Whilst we were not surprised to see markets sell off in January we were surprised by the extent of it given very little had fundamentally changed.
Fear and greed can lead to significant swings in the market and it is months like January when it is worthwhile reminding ourselves that the volatility of the market (the degree to which prices move up and down) is the price we pay for the long-term outperformance of shares.
Whilst we have treated this dip in equity markets with more caution than previous ones - due to there being some legitimate areas of concern - we have been selectively buying where we see value as we strongly believe that in time we will be rewarded for keeping a cool head whilst many other market participants let fear become their overarching driver.
Following is a recap of market movements in January.
The US share market had a disappointing start to the year with the S&P 500 index down -5.0% in January.
At a sector level, health care and financial stocks had the biggest falls over the month. Biotech companies dragged the wider health care sector lower amid political criticism over medicine prices. On a wider level, biotech share prices were also caught up in the down-draft that cyclical sectors of the market experienced (those that are more sensitive to the economic cycle). Financials also fell victim to this theme. Unsurprisingly more stable, defensive sectors outperformed. Of interest energy stocks rebounded during the month after the price of oil rose due to talk of possible cuts to crude oil output by oil-producing nations.
In Europe the EuroStoxx50 fell 6.8% following on from a weak performance in December. This despite the European economy continuing to show signs of resilience. For example a number of lead indicators beat expectations in January and continued to point towards economic growth. Elsewhere, bank lending surveys conducted by the ECB continued to show an increase in banks’ willingness to lend. This was complemented by an increase in corporate appetite to borrow, which implies increased confidence in the economy’s prospects.
Due to low inflation and a weaker growth outlook in emerging markets especially, the European Central Bank (ECB) emphasized its commitment to very loose monetary policy. Mario Draghi, the ECB president, said that interest rates will “remain at present or lower levels for an extended period of time” and said there are “no limits” on the extent to which the ECB is willing to deploy measures within its mandate. The markets interpreted this as meaning further “monetary medicine” will be forthcoming at the ECB’s next meeting in March.
In the UK the FTSE100 fell 2.5%. Confirmation that the economy grew by 0.5% in the fourth quarter of 2015 and 2.2% for the year, appeared to lend support to the market. The month was also notable for a series of positive trading updates from retailers, proof perhaps that the UK consumer, if not the stock market, is benefiting from lower fuel prices.
Asian equity markets had a particularly tough month, as investors reacted to a familiar list of concerns: worries about China adjusting to a lower growth path, efforts by the Chinese authorities to manage the renminbi (RMB) and a falling oil price. Japan’s TOPIX down 7.5% whilst the roller-coaster ride that is the Chinese stock market saw the Shanghai Stock Exchange Composite Indicator fell 22.7%.
The MSCI Emerging Markets Index fell 5.3% over the month with all of the various emerging market regions posting a negative performance. The ECB’s commitment to “do more” and Bank of Japan (BoJ) Governor Kuroda’s surprise move into a negative interest rate strategy helped avoid further losses.
Across “the ditch” and the ASX200 posted a drop of 5.5%. The mining and energy sector again dragged the market lower whilst tumbling share prices also contributed to the poor performance.
Back home and the NZ50G outperformed global equities posting a loss of 2.4%.