Having a look at some of the biggest winners and losers on the global financial markets in 2015, Jamaican stocks result to be among the top performers; the island nation’s index rose more than 80 percent. As for losers, the political issues and lower oil prices have hurt the Ukrainian equities index, which has tumbled 56 percent year-to-date.
At the same time, on the developed Market, Eurozone equities enjoyed some rallies in 2015, buoyed by the ECB’s bond buying and the weak euro. In terms of local currencies, Europe’s benchmarks did well this year. Investors greeted Italy for finally dragging itself out of a triple-dip recession, but in Spain, fears of political impasse outweighed the excitement surrounding its economic recovery. The commodity rout hammered London’s FTSE 100 as it went down 4.8 per cent on the year.
Had it not been for a small group of nifty companies, 2015 would have entered the history books as a terrible year for the US stock market.
The consumer discretionary sector led the way this year, followed by healthcare. However, energy and materials companies were the biggest loosers due to the decline in price of many commodities. Yet there were some very positive numbers for a group of four companies that have come to be known as the “Fangs”(Facebook, Amazon, Netflix and Google) and for a wider group that included Microsoft, Salesforce, eBay, Starbucks and Priceline to create the “Nifty Nine”.
Both groups gained more than 60 per cent throughout the year.
Part of the reason for that was that profits were declining. This was in large part due to decreasing revenues at energy companies, driven by falling oil prices. But the strong dollar, which hit overseas earnings, was also a factor. In the same manner declining margins played a key role, as wages started a slight recovery. Therefore investments flow mainly to the enterprises that can show strong revenue growth. That is extremely worrying.
Dominance by a few big companies is a symptom of the end of a bull run, as it happened in the early 1970s (dominated by the “Nifty Fifty”) or the late 1990s (dominated by the dot-coms).
The rise of tech startups with extremely high valuations, as well as the ‘FANG’ group of stocks, has generated much concern over whether or not we are in another tech bubble. According to Goldman Sachs, there is one important difference between the confirmed tech bubble we saw in the late 1990s, early 2000s and today. The big difference is earnings.
During the tech bubble, tech companies never accounted for more than 16 percent of the total index earnings. As January 2016, tech earnings contribute for over 20 percent. Regarding the market cap, tech companies’ accounts for a smaller portion of the S&P 500 in comparison with previous years. In fact, as today, the tech industry’s market cap represents only 21% of the S&P index as compared with previous peak figures of 32%. (smaller market cap of S&P 500, higher earning, hence it is less likely the bubble will repeat itself).
FORECAST AND RISKS
The US stock market has vastly outperformed the rest of the world after the 2008 crisis, accommodative monetary policy helped this to happen. So did the strength of the US economy, while the strong dollar also amplified the outperformance. Yet a too strong dollar might hit the US companies’ overseas earnings while strengthening the rest of the world, and other central banks are now aggressively easing monetary policy while the US Federal Reserve has just started to raise rates.
The growth gap between the US and Europe is starting to narrow. At this point in time, we are expecting Europe to see GDP growth of roughly 1.75 per cent in 2016, against 2/2.5 per cent in the US. This was mainly caused by the rising dollar price that redistributed growth and corporate earnings from the US to Europe. It would be a surprise if in the second half of 2016, the European economic growth accelerates beyond the US growth. Such a result might produce a year of earnings growth for European listed companies, something which has failed to happen since 2010. Stronger Europe growth would challenge assumptions that very low interest rates have become normal.
The UK is expected to follow the US and raise rates by the end of the year, yet Europe is still cutting them. China’s economic wobble (which has deepened the commodities crisis and by doing so, dragged the FTSE 100 down with it) has depressed emerging markets.
Even the political landscape is shifting. A presidential election in the USA and the European referendum in the UK are creating speculations over what “Brexit” or a Trump presidency might mean for investors. The other main risks for this year are Fed’s mismanaging communication of its process, which could have a destabilising impact on financial markets and another round of deflationary pressure exported from China.
Moreover the world’s major economies are beginning to diverge. The US was the first to begin the withdrawal process from rock bottom rates, but fears remain about its future growth prospects.
Businesses compete for investor money and also offer corporate debt (bonds) to fund operations. If the rates of Treasuries rise due to Fed action or a spread selloff in the bond market, then a company that wants to raise capital must offer higher rates of return on their bonds offerings. This higher rate of return is a larger burden on their balance sheets and decreases profitability therefore they will have lower EPS. Considering also the higher borrowing rates of businesses and consumers, a general slowdown in corporate profits could arise. This slowdown will result in the liquidation of share holdings in search of better investments.
For the commodites sector, 2015 was characterised by a strong downward trend.The worst performers were West Texas Intermediate and Brent Crude oil. Metals, such as platinum and palladium were down by roughly 30% along with gold losing up to 10%.
In agriculture, the coffee fell down by 25%, while it was an upward year for cotton and sugar. The collapse in oil prices during 2015 was determined by the slowdown in China’s economical growth and the unchanged Saudi Arabia’s oil production, which has not decreased in order to stop the business of fracking in America. If oil reserves reach the maximum of their production capacity and the oil demand decreases further down, the oil price will suffer further downward corrections.
The general consensus of the Brent’s price for 2016 is 50$ per barrel, compared to the 29$ per barrel at the moment. Furthermore, Iran, free from sanctions, will add to the current level of world production (95 million barrels per day) half a million barrels per day. Three major investment banks (Morgan Stanley, Citigroup and Goldman Sachs) warned that if oil storages continue to rise, the price might reach a minimum of 20$ in the short term.
However, the decline of oil production in the United States, will counterbalance the levels of world production, creating conditions of getting prices to reach the ones agreed in the consensus. Consequently US WTI crude oil is keeping its outlook at $45 a barrel, while for Brent crude oil at $50 a barrel in 2016. Finally major investment banks analysts forecast gold to remain around $1,100 per ounce for the next three months, $1,050 an ounce for the next six months and $1,000 an ounce for the next 12 months.
London, Jan 19th 2016
Luca Cartechini, Head of Asset Management
Fulvio Abbonato, Asset Management Associate