The first quarter saw stocks make a V-shaped recovery, as central bankers tried unorthodox measures, reports Chief Investment Officer Chris Ralph.
It was a rough start to the year for investors, as an alliance of fears caused prices to fall across global equity markets – the S&P 500 suffered the worst start to the year since 1957,
But from the losses of mid-February were swiftly reversed as stock markets around the world experienced a V-shaped recovery, bouncing back in the second half of the quarter. Leading the recovery was the S&P 500, which ended the period up 0.8%; despite energy companies suffering heavily. 21 US companies abandoning planned initial public offerings (IPOs).
Although growth forecasts for the US economy were largely revised downwards in March, they still remained comfortably positive; there were further encouragements in the form of more positive data on jobs resulting in an unemployment rate of 5% and an improving inflation outlook. A scaling back of rate rise intentions ingratiated the Fed with investors and provided a boost for emerging markets.
The FTSE 100 made up most of its losses, finishing down 1.1%. Although growth and job data offered tailwinds, manufacturing indices disappointed and the current account deficit recorded a new peacetime record. The setting of a date for Britain’s EU membership referendum was widely cited as the reason for sterling’s fall against major currencies. Nevertheless, yields on 10-year gilts actually fell during the period.
Asian markets struggled much more. Slowing Chinese growth provided a headline worry, and the country’s own forecasts suggest a first-quarter growth rate of just 6.7% (annualised). Japan already faced slow growth and non-existent inflation, but over the quarter the yen gained almost 7% against the dollar (and even more against sterling) – a blow for exporters.
The Nikkei 225 fell some 12% over the three months, although a strong final quarter in 2015 meant this looked worse than it was, while the Shanghai Composite dipped 8.9%. But March was a good month for emerging market stocks, which gained by almost double the global average, according to MSCI indices. Moreover, despite China’s poor performance, it saw a record level of M&A activity (possibly encouraged by Beijing) and the only $1 billion-plus IPO of the quarter.
The price of commodities was never far from investors’ minds. The prices of oil and a slew of major metals had fallen dramatically in 2015. Little wonder, then, that one of the best-performing metals in the first quarter was gold, that haven of the fearful; its price rose 20%.
It was outdone by iron ore, however, which enjoyed a first-quarter bounce of almost 25%, as Chinese steel prices and production levels began to recover. Oil also made a comeback, rising from under $30 to around $40 a barrel. Neither recovery could come too soon for stricken mining and oil majors; but prices still needed to rise considerably for share prices to recover – and for dividends either to be secured or to be reinstated.
Despite the slight uptick in prices of a few leading commodities, deflationary pressures persisted in much of the world. At the time of writing, almost a quarter of the global economy is in a currency area where negative rates have been imposed. Nevertheless government and corporate bonds performed well during the quarter due to these accommodative policies. Perhaps the most important of the zero-rate setters was the European Central Bank (ECB), which pushed the deposit rate down to -0.2%. At the end of March, inflation in the eurozone was registered at -0.1%, still very far from the ECB’s 2% target.
The eurozone economy was on track for unremarkable growth in the quarter, but the FTSEurofirst 300 ended the period down 7.7% on a number of worries, among them cheap oil, the migrant crisis (and its political fallout), low growth, problems in the banking sector, and a strengthening euro.
In the coming months, markets around the world are likely to remain focused on the fortunes of the leading commodities, central bank policy in the US and Europe, corporate earnings, and the possibility of a UK exit from the EU. Any continued radicalisation of democratic politics in major Western countries would also concern markets, potentially contributing to heightened volatility.
Yet for all the worries, the best companies continue to grow and to see that growth reflected in their share prices. If the world looked a bleak place in February, investors only needed to wait until the end of the quarter to see how quickly prices recovered. A full economic blooming it is not, but at least some early buds have appeared.
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