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Market Analysis: January 2016

Independent financial planning firm Gale and Phillipson casts an expert eye over the UK international market activity in January.

So the New Year began and any optimism market participants felt about index movements ended very quickly as China led the way in what was perhaps the worst post-New Year’s hangover ever. Equity markets across the board felt the pain, seeing losses in value over most of the month (although there was a small recovery right at the end). Bad news aside, it is worth noting that the ‘dip’ seen in emerging equity market values is not as severe as the one seen in August, or over May. Although the fact that both of those were over the last year is probably poor comfort for investors.

Apart from China, another factor commonly named as being behind equity market slumps was the falling price of oil (and its immediate effect on some major index constituents in the Oil and Gas sector) as Iran rolled up to ‘Implementation day’. This was the date that sanctions would be lifted and Iran could start supplying oil to the world markets again. The effect of this anticipation was pretty palpable as at one point in the month oil prices (for Brent crude) fell below $28 a barrel, the lowest seen since 2003. To put this in perspective, two years ago a barrel of oil traded above $100. And while calling that dramatic might well be justified, it’s important to keep this drama in perspective. Oil prices did bounce back to around $35 by month end, and more importantly low oil prices have acted as a key to spurring on longer term global growth through most of recent history. So perhaps it’s not all doom and gloom for 2016 after all? Watch this space.

UK

‘Half’ was definitely the theme of the month for the UK. What was the performance of the economy in the last quarter? Half a percent (ONS figures). What’s the interest rate from the Bank of England? Still half a percent (surprise). What did London Mayor Boris Johnson think of the EU negotiations? Totally half-*ahem*. Nevermind. The Prime Minister brought back a drafted agreement which held several key proposed changes in the UK’s membership in the EU. There is still no date set for the referendum and the deal will need to be agreed by a lot of other EU nations so there is still plenty of time for changes. Stay tuned.

EUROPE

Definitely mixed messages from across the channel this month as President Hollande announced mid-month that France was in a state of ‘economic emergency’, setting out a €2bn job creation plan. However, less than two weeks later, it was reported that the French economy grew at the fastest pace in four years in the last quarter of 2015. Whether this boost is due to possibly the fastest acting economic incentive ever or the stereotypical French ‘je ne sais quoi’…I couldn’t possibly say.

US

The US saw a slowdown on growth in the final quarter of 2015 as the world’s largest economy grew at an annualized rate of 0.7% (compared with last year’s 2.0%). Analysts noted that the mild weather had contributed to a drop in consumer spending in the final quarter, but that investment in the energy sector had dropped by 35% in 2015, the largest drop in thirty years. Ouch.

ASIA/PACIFIC

Japan once again grabbed headlines (just within economic newsfeeds but still) this month as in a surprise move the Bank of Japan introduced negative interest rates – a move dubbed the ‘Kuroda bazooka’ after the governor of the bank. Specifically, the new benchmark rate of -0.1% will be charged to some deposits commercial banks hold with the central bank. This move is aimed to ‘encourage’ banks to lend out funds to businesses, and is already employed by the European Central Bank (ECB).

EMERGING MARKETS

The effect of the slowdown in Chinese economic growth was felt in 2015, as African exports to China fell by almost 40%. Elsewhere Venezuela declared a 60-day state of economic emergency. The South American country depends on oil exports for up to 95% of its revenue, and, well, let’s just say recent oil price movements haven’t exactly been welcomed.

FIXED INTEREST SECURITIES

Recent analysis on corporate bonds in the US has left some analysts scratching their heads. The spread of (or ‘gap between’) the yields of US Treasury Bonds and investment grade corporate debt is pretty wide right now compared to historical averages, leading some to expect the spread narrowing as inevitable. This sets off the warning radar of those watching bond markets as historically this has been a herald of a recession being on the horizon. However, the yield on bonds is already pretty low compared to the same historical averages. Which, some analysts argue, makes it less likely for markets to see further rate falls (which would reduce the spread). This has added fuel to the debate over what is the ‘new normal’ for returns, and if 2016 will be the year something gives as these extraordinary markets continue.

This was posted in Bdaily's Members' News section by Gale and Phillipson .