Was 2015 As Bad as We Thought?
Was 2015 As Bad as We Thought?06 March 2019 Written by James & George Collie

Prices-Rising

Q4 Market Review

An already volatile 2015 has witnessed further turmoil this quarter as concerns regarding the crisis in Greece receded following a last minute bailout only to be quickly replaced by concerns that growth in China may be slowing and could impact on global economic growth. In addition, the wider geopolitical problems and tragic incidents in Paris have also done nothing to calm sentiment.

Bond and stock market performances were volatile during the quarter with global stock markets falling sharply during August and into September, causing anxiety for some investors, before recovering some of the losses.

However, to put the recent volatility into context the FTSE World Index, which peaked on the 10th of April at its highest ever value and ended this reporting period 8.46% lower than the peak, has actually risen over 2% during 2015. In fact, if 2015 turns out to be a loss making year for this index it will only be the third in the last decade. The return over the previous 10 calendar years has been 81.01% which is considerably ahead of cash and inflation.

The ten year period which began in Jan 2006 has not felt like a good period for investors despite the reasonable absolute returns. The credit crisis crippled global banks and international stock markets in 2008/2009 and has been followed by a series of other crises including defaults by Euro members, US debt ceiling negotiations, Arab Springs, the Russian incursion into Crimea and more recently concerns of a slowdown in Asia and more specifically in China.

As we consider the recent period of volatility it is important to focus on the areas of good value and poor value. Whilst markets are moving quickly at present, we expect that when volatility reduces again in the future, prices will have moved significantly from current positions. Identifying the right assets at this stage is important to achieving positive investment returns.

The recent falls in global equity markets are not abnormal and unfortunately are a re-occurring feature of stock markets. Longer term investors have still benefitted from market participation despite the falls, although recent investors may be feeling less comfortable. These falls have been triggered by concerns of a slowdown in China and other developing markets as Western economies are reliant on these regions for export demand.

These concerns, along with resurgent Western economies, have led to the Asian and Emerging Markets underperforming the developed world by around 40% – 50% since October 2010. Given the nature of the global economy it was unexpected for one area of Global markets to perform so differently to another. As assets flowed into the quantitative easing economies of Japan, the US and Europe it took a tide of capital away from other markets (Asia and Emerging Markets in particular) resulting in a significant valuation differential.

Western markets have now followed Asian and Emerging Markets down and it seems the realisation is dawning that all major economies are reliant on each other for growth. The exodus of assets from one area ultimately has an effect on the whole system and there are early signs of a reversal as flows into Asian funds have turned positive for the first time in a long period.

The key question at this stage is; will falling growth in China pull the whole global economy back into recession? This is possible but seems unlikely. Growth has been re-established in Western economies post credit crisis and the actual slowdown in China is now likely to be shown to be less than was the perceived view. China is in a position to stimulate economically if needed and the authorities are expected to be open to this action. The Federal Reserve is also open to further quantitative easing if required (it seems unlikely this will be needed) whilst Japan and Europe continue to print money and will extend this policy until they see growth or inflation.

Taking all of this together, we conclude that the current sell off is uncomfortable, but normal within a market cycle and this is often indicative of a change in trend. The two trends which we feel are overly mature are the rise of bond markets (the current cycle began in the late 1980s) and the underperformance of Asian and Emerging Market equities. There are early signs that both of these trends may have reversed already. Global growth is expected to remain positive and we expect long term investors to continue to enjoy good returns above cash and inflation.

In conclusion, further stimulus will be applied if needed, but inflation and growth are expected to come through going forward, especially as the commodity cycle feels much closer to the bottom than the top. Equity markets should recover losses and Asian and Emerging Markets have the potential to close the valuation differential, whilst fixed interest markets look vulnerable.

So here’s to a more stable and prosperous 2016!

Merry Christmas and a Happy New Year from all at James & George Collie Financial Management.

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