Global Stock Market Viewpoints: Fourth Quarter 2016
Globally stocks finished the year on a downbeat note with a slight decline in the fourth quarter. US stocks outperformed their global peers by a healthy margin in 2016. Some of the post US election rally did find its way into the global stock markets, but a stronger US Dollar neutralized much of the returns. The top performing sectors in the quarter were the financials and energy while consumer staples and real estate were the weakest performers.
Europe pulled back in the quarter as concerns over terrorist attacks, momentum in populist political movements and the failed Italian referendum were too much to overcome. In Italy, voters overwhelming voted down constitutional reforms which would have allowed for reform measures to be more easily passed. The “no” vote was widely expected and did not have a significant impact on the markets. The European Central Bank (ECB) announced plans to continue their bond buying program through 2017. They are reducing their purchase amount from 80 Billion Euros per month to 60 billion Euros.
The overhang from three key elections and details about the BREXIT plan are obscuring signs of improving economic growth. There are elections scheduled for the Netherlands, France and later in the year Germany. These will grab headlines as will the specifics about the UK leaving the EU, which is expected in March. Economic data out of Europe is looking the most upbeat in over 5 years. The weak Euro and Pound has helped to lift both the services and manufacturing sectors across Europe. We are positive of stocks in Europe, but expect 2017 to be a volatile year given the noise around elections.
The Yen weakened significantly in the quarter which affected returns for US investors. Shares were flat for the quarter adjusting for currency moves. The markets once again focused on the actions from the Bank of Japan (BOJ), Japan’s central bank. After years of unprecedented monetary policy there has only been marginal gains made by the economy. Japan has tried negative interest rates and buying exchange traded funds (ETFs) to stimulate the economy and create some inflation. Japan’s purchase of the ETFs has led to the BOJ being a top ten shareholder in many Blue Chip companies. The BOJ is planning to keep buying stocks in 2017 and this should provide a floor in the market. International investors have been buying in Japan as well which should serve as a short term catalysts.
Canada, Australia & Asia
Canada’s rally continued again this quarter and capped an excellent year for their market. Energy and banking stocks have lead the rebound north of the border. Recovery and stability in energy prices have directly helped bank stocks recover. They have seen lower loan defaults and an increase in loan activity since the bottom in oil prices. Australia’s outlook is clouded by commodity prices and their housing market. Uncertainty around China’s demand for raw materials continues to be a big issue for Australia in 2017. Housing prices have climbed rapidly during Australia’s economic expansion and concerns that a pullback could occur has some cautious about Australia’s market. Asian markets pulled back in the fourth quarter in response to the US election, rising interest rates and a strong US Dollar. US trade policies are a wild card given the uncertainty with the Trump administration’s positioning during the campaign and transition period. Rising rates and a strong US tend to draw money out of Asian markets and can cause their borrowing costs to increase.
The currency markets was where most of the excitement happened in the quarter. All major currency’s pulled back against the US Dollar. The primary cause is rising interest rates and better economic growth expectations in the US. This has drawn investors into the US Dollar and US Dollar based investments. The British Pound, Euro and Swiss Franc all fell between 5% and 6% in the quarter and the Yen declined over 15%. It keeps getting cheaper to take a trip to Europe!
You can read our 2016 Third Quarter Global Market Viewpoints here.
Andrew Comstock, CFA
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Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.