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Another Year, Another Dollar


GodfreyO
  • “Cheers to a new year and another chance for us to get it right.” Oprah Winfrey

    It’s December already and the year seems to have gone by in a flash. It doesn’t seem that long ago that excessively bullish sentiment was front and center of our minds, even if a US recovery was still uncertain and the noises out of Europe were worrying. How quickly we move on.

    Investors will be catching their breath after another uncertain year and the “will they, won’t they?” Fed deliberations. In September the VIX Index partied like it was 2011 all over again, the last time the volatility measure rose above the 40 level. That time we had the European sovereign debt crisis, this time we had China. We live in an interconnected world.

“Cheers to a new year and another chance for us to get it right.” Oprah Winfrey

It’s December already and the year seems to have gone by in a flash. It doesn’t seem that long ago that excessively bullish sentiment was front and center of our minds, even if a US recovery was still uncertain and the noises out of Europe were worrying. How quickly we move on.

Investors will be catching their breath after another uncertain year and the “will they, won’t they?” Fed deliberations. In September the VIX Index partied like it was 2011 all over again, the last time the volatility measure rose above the 40 level. That time we had the European sovereign debt crisis, this time we had China. We live in an interconnected world.

As 2015 comes to a close it’s time to look back on another memorable year for the markets - memorable in part because we have finally put to bed the “Great Equity Market Bull Run” that blossomed out of the ashes of 2009. Yes, the Dow Jones Industrial Average hit an 18,351 record high back in May, but the market swings experienced in the second half of the year suggest we shouldn’t expect the market to oblige with a straight line trajectory in 2016.

So what have we learned?

  • If you weren’t too familiar with the Chinese stock market before this year, you’re certainly more aware of it now. Never has a 7% annual growth rate (or there abouts) turned out so messily for a country. The global market rout seen in August tells us that. As Chinese authorities battled to prevent the boom-bust behavior spilling into the real economy, so much wealth was created and so much destroyed in so short a period of time. It’s the meeting of free market principles with a managed economy. The experiment remains a work in progress. China’s increasing presence on the world stage, though, means investors have no choice but to monitor events there.

  • And China’s slowdown and subsequent government interventions have had huge ramifications across the board: commodity prices have collapsed, hurting resourced-biased economies from Australia to Brazil to Chile. It postponed the Fed's rate hike decision in September. It sent emerging market currencies into panic mode. It even managed to take a bite out of Apple’s revenue as smartphone shipments in this key market for the company slowed. Shipments are forecast to grow about 1% in 2015, compared with a 20% increase in 2014 and 64% in 2013, according to market research firm IDC.

  • In case it escaped anyone’s attention, Europe remains a basket case. Even without the enormity of the migrant crisis – and 2016 doesn’t look like a year of resolution for this - we’re talking about a region with a central bank that began a $1.2 trillion quantitative easing program in March and is likely to do more. The Greek crisis is still, well, a crisis. Meanwhile, the shadow of terrorism once again loomed large though Islamic State-inspired atrocities. Add to that the unconvincing post-austerity recoveries that have fed voters frustration and lurches to the extremes of the political spectrum, and you can see why confidence is fragile. The region is set for a very different growth trajectory to that of the US and that’s playing out in interest rate expectations and euro weakness. The divergence in regional cycles isn’t great for investors.

  • Emerging markets were supposed to make up for the global growth where developed markets, and Europe in particular, were falling short. We were supposed to be embracing CIVETS (Columbia, Indonesia, Vietnam, Egypt and South Africa) as we tired of BRICs (Brazil, Russia, India and China) and milked the EM story further. Unfortunately, we've hit a pause button here. The EM space has showed signs of rolling over at a time that the US is showing signs of recovering. And having borrowed heavily in US dollars, a rising currency that will accompany rising US interest rates will continue to provide headwinds for EM. The threat of heavy fund flow out of these markets and into a US market of rising interest rates is a risk for 2016. Let the flight to quality begin.

  • Most of the smart money accepted the price of oil wouldn’t return any time soon to the heady days of above $100/barrel seen back in summer 2014. But while the setting for 2015 may have looked challenging with West Texas Intermediate grade oil at the $60 mark, who would have guessed we could end the year closer to the $35 level? The oil story is where the macro picture meets geopolitics, very little of which has been supportive.

  • The gold bugs have also gone quiet, for now at least. The commodity’s early-year peak of $1300/oz now looks a world away from $1066 now. The prospects of a rising interest rate environment ensured that plenty of institutional money departed stage left in recent months, leaving plenty of retail investors newer to the game with holdings significantly under cost price and effectively waiting on the next crisis.

  • Geopolitical tension and terrorism are now part of life. For good or for ill, the market doesn’t get so shocked by terrorist attacks any longer. The shooting down of a Russian passenger plane, the tragic November events in Paris, the San Bernardino attacks, and the Charlie Hebdo terror all shook us as individuals. But the market absorbed the events and moved on.

The consensus view for 2016 is broadly cautious so read that as expectations for another bumpy ride. The Fed’s rate normalization process, China’s growth narrative and Europe’s state of disrepair provide the backdrop. Let's also not forget the small matter of a US presidential election and that can polarize and impact market sentiment.

Suffice to say none of us have a crystal ball and most forecasts coming out now for 2016 will be proved wrong, at least in part. That’s not to say we shouldn’t listen to them but as investors we do very often have short memories. Before we know it we’ll be excessively bullish again. Let’s just see now how quickly we move on.

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