While some concerns lingered, investors could find reasons for optimism in the final quarter of 2015.
A challenging year on markets received a dose of seasonal cheer in the fourth quarter, as uncertainty over US interest rates subsided and the impact of China’s stock market fall began to tail off, at least until the New Year.
The US’s leading index, the S&P 500, rose more than 6% from its September low in the final three months of the year, while the Nikkei 225 rose by almost 9.5% through the quarter. Even the recalcitrant FTSE 100, whose year has suffered on the back of declining oil and commodities prices, enjoyed a bounce of almost 3% across the period.
But leaving the valley is not the same as scaling the peaks, and markets had a great deal of lost ground to recover after a troubled summer. In the end, the fourth quarter was more about recovering recent losses than making fresh gains – the S&P 500 ended the year little changed.
The great outperformer among major indices was Japan’s Nikkei 225. Despite marginal GDP growth, confidence in Japanese companies appeared to be growing, thanks in part to new rules on corporate governance introduced in June; and the successful $11.5 billion listing of Japan Post in November – after two decades of debate – was an important marker for Japan Inc.
The fact that such relative successes merit mention illustrates just what a mediocre year it was; even a more buoyant fourth quarter was unable to rescue the FTSE 100 from a negative outcome, or to stem the decline of metals or oil. In November, OPEC declined to cut oil production; in December, Brent crude fell below $40 a barrel. Meanwhile, a pollution deception scandal at Volkswagen – first reported on 18 September – worsened considerably during the quarter.
The stock market falls in Shanghai and crisis at Volkswagen coincided with a year of only tentative recovery, when markets were especially sensitive to unforeseen events. The final quarter offered little evidence that calm had been restored – the VIX index, which measures volatility on the S&P 500, spiked above 20 (the marker for high volatility) twice in December (against just three times during 2014).
Poor factory data in the New Year led fourth-quarter estimates for US growth to be downgraded, but many fundamentals remain positive in the world’s largest economy – unemployment is just 5% and the World Bank predicts annual growth at a respectable 2.7% (albeit before the recent factory data news). The Federal Reserve felt confident enough to make its first rate rise in nine years; in December the federal funds target rate rose from near-zero to a new range of 0.25–0.5%.
In the eurozone, where the World Bank forecasts 2015 growth at 1.5%, Mario Draghi offered a helping hand in mid-October when he announced: “We are ready to act if needed [and] we are open to a whole menu of monetary policy instruments.” The ensuing December easing disappointed markets for not going further, but was still a welcome boost – it will have the secondary effect of helping the eurozone address sovereign debt challenges, too.
Leaving aside the ECB’s communications shortcomings, the fourth quarter certainly provided reasons to limit easing, as eurozone unemployment reached its lowest point in four years in December. In Germany, unemployment fell to its lowest level since reunification in 1990 and domestic consumption – a persistent weakness in the German economy – reached a 15-year high. Eurozone inflation remains disconcertingly low, but the impact of falls in oil and commodities prices will soon begin to dissipate. The FTSEurofirst 300 rose by 5% over the course of the year – the fourth quarter accounted for almost all of the rise.
In the UK, growth and unemployment offered bright spots through the quarter, while government debt figures came in significantly worse than expected. The Bank of England’s Monetary Policy Committee declined to raise rates, reflecting fears about persistent low inflation. In terms of the major central banks, this placed the UK somewhere in the middle – neither tightening like the Fed nor easing like the ECB and Bank of Japan. A 2016 hike is by no means a certainty.
Focus is now turning to the Budget in March, which is expected to announce the launch of the government’s much-vaunted pension reforms, and to the forthcoming referendum on EU membership.
Worries over China and commodities continued to dominate markets in the fourth quarter – global metals demand in particular is heavily driven by Chinese manufacturing, which slowed in 2015. The Brazilian and Russian economies are currently the biggest casualties of falling oil and commodities prices. The World Bank forecast China’s 2015 growth at 7.1% (and then continuing to slow slightly in subsequent years), yet the country still has significantly higher growth than any other major world economy. Moreover, as a resource-poor but manufacturing-intensive country, it stands to benefit somewhat from low prices, in oil as in metals.
After a troubled year on markets, glimmers of hope in the fourth quarter offered a reminder that many of 2015’s fears had been exaggerated. Despite a shaky start to 2016, investors can take heart that, while global growth may be low, it is very far from absent.
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