Global Stock Market Viewpoints: First Quarter 2016Submitted by Castlebar Asset Management on April 1st, 2016
The first quarter sent investors around the world on a wild ride. Stocks started the year off with a dramatic sell off. In the first six weeks global markets fell 12% before staging a furious rally to post only slight losses. Early in the year investors were concerned that energy prices were in free fall, China’s economy was stumbling and the Federal Reserve raised rates prematurely. Sentiment turned around in mid February when the realiztation that economic data and corporate earnings were not nearly as bad as people had feared. The dollar did weaken during the quarter which finally helped investors with their performance.
European shares posted slight losses over the past three months. The markets were not materially impacted by the recent terrorist attack in Brussels. Unfortunately, investors have priced in periodic terrorist attacks into expectations after the attacks last year in Paris and subsequent events in March. What caused the markets to decline was underwhelming economic data and corporate earnings. The European Central Bank (ECB) cut interest rates to negative levels and expanded their bond purchase agreement. The hope was to spur growth but there is growing concern that monetary policy effectiveness may be beginning to wane.
Most investors are looking ahead to June when the UK will be voting on if they will stay in the European Union (EU). This is being dubbed as the “Brexit” vote and right now the odds makers believe there is a strong likelihood that the UK will stay in the EU. Yes, you can actually place a wager on this in the UK! If the UK were to exit the EU it would create a complicated mess. Common standards, trade agreements and financial regulations would all have to be recreated for the UK to work with their European peers. Expect this to cause some volatility in the currency and stock markets if the polls start to narrow. Our outlook is favorable for European stocks. Expectations are low and valuations are attractive on a relative basis. There is a political risk in the near term on multiple fronts, but this is being discounted into prices.
Shares in Japan were weaker in the first quarter. A strong yen weighed on stocks. The Bank of Japan (BOJ) continued with their aggressive monetary policy moves trying to break their economy from a two decade slump. The BOJ followed the ECB by lowering interest rates into negative territory, although not nearly as negative, and expanded their asset purchases. The market reacted opposite how the BOJ wanted because interest rates moved higher and the Yen strengthened by 6.6%. This pushed exporter oriented shares lower. We continue to be neutral on Japan.
Canada, Australia & Asia
Canada was the strongest market in the quarter after a dismal 2015. Their market rallied in March as energy prices bounced off their lows. The Canadian economy has been impacted by weaker commodity prices but is holding up better than expected. Australian shares were positive over the past three months. Australia has successfully shifted their economy from a commodity producer to providing services around the region. China is still their largest export partner but Australia has managed to pivot from supplying raw materials to a broader array of services without their economy dipping into a recession. Asian markets were mixed in the quarter with Singapore having strong gains while Hong Kong finished modestly lower. Asian markets are expected to remain volatile as investors in this region focus on the statements from central bankers in the US, Japan and China in the coming week.
The US Dollar declined against most major currencies in the quarter. The exception was the British Pound. It fell 2.9% over concerns surrounding the “Brexit”. The Euro and Swiss Franc rallied 4.1% and 3.1% in the quarter. Dollar block currencies gained between 4% and 6% with the Canadian dollar being the strongest adding 6.8%. This is directly related to the rebound in energy prices late in the quarter. We are neutral on our currency expectation in the near term. The US has positive interest rates with the expectation that they will move higher. Europe and Japan have negative interest rates which would lead more people to own dollars but these are not “normal” times so hence we are neutral.
You can read our 2015 Fourth Quarter Global Market Viewpoints here.
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.