Global Stock Market Viewpoints: Third Quarter 2016Submitted by Castlebar Asset Management on October 5th, 2016
Global markets had their best quarterly returns since 2013 during this third quarter. Stocks outside of the US outpaced the S&P 500 by 2.5% beating the US market for the first time since Q1 of 2015. Investors immediate fears about the BREXIT vote repercussions were set aside and their attention was turned towards actions from central bankers around the world. Both Europe and Japan continue to see significant stimulus measures by central banks. Currencies were relatively stable in the quarter with only small moves after a volatile second quarter.
European stocks rallied after concerns over the BREXIT vote subsided. The Dutch, German and Spanish markets lead the way all returning better than 8% in the quarter. The moves were broad based with all major markets positive for the quarter. The focus for investors shifted to central banks and the capital positons of Europe’s banks. The European Central Bank (ECB) is investing about $90 billion per month on government and corporate bonds. This has pushed interest rates to historically low levels. Investors have shifted up the risk curve in search of returns which has helped European stocks. There are limits to how long the ECB can continue with their stimulus and the overall success of their policy. In the short term, their stimulus will continue to serve as a catalyst. Banks in Europe are in focus as their capital situation is being scrutinized by investors. Deutsche Bank and several Italian banks are catching the ire of the market because there is concern they are undercapitalized. Since the financial crisis there have been a series of band aid measures to shore up their capital positions. The noise around this won’t lessen until they actually raise more capital.
There is a long list of uncertainties for investors to think about over the next year. The BREXIT negotiations will start in early 2017, the ECB future policy moves and a crucial Italian constitutional referendum in December are on the table. Valuations are attractive on a relative basis for European stocks, but we expect markets to remain volatile.
Economic data continues to show that Japan is still coping with their deflationary issues from the past two decades. Prices today are lower than they were in 1997. Stocks none the less continue to move higher. The two factors which are lifting stock prices are purchases by the Bank of Japan (BOJ), their central bank, and companies buying back stock. The BOJ is buying ETFs as a way to raise asset prices. In some cases, they are the largest shareholder for many blue chip Japanese companies. Corporations have announced more buybacks this year so far than all of 2015 combined. Given Japanese companies are cash rich, interest rates are negative and there are limited incentives to reinvest in their businesses, buying back stock is a logical alternative. Both the BOJ and companies will help lift share prices in the short term. There is a limit to how long the BOJ can keep their pace of buying up and up too what valuation level companies are comfortable buying shares back. We remain neutral on Japan but still expect the positive trend to remain in place.
Canada, Australia & Asia
Canada continues to keep its winning streak going with the market up 18% this year. Stable energy prices have helped their market recover. Real estate continues to be a cause of concern. Vancouver and Toronto have seen significant appreciation as foreign buyers have bid up the market. There is likely a correction coming soon in real estate prices but given the stronger lending requirements it should not resemble the US house crisis. The Australian economy has seen 25 consecutive years of growth and is growing at its fastest pace in three years. Australia is closing on the Netherlands record of 26.5 years without a recession. Hong Kong had a great quarter rallying in lock step with China and other emerging markets.
The currency markets were quiet this quarter after a volatile period in June. Most currencies were range bound, up or down 2%. The British Pound continues to slide lower as concerns over the BREXIT remain. The details are still being worked out on a timeline for an exit and the currency fell another 2.4% in the quarter. It is now sitting at near 30 year lows. I’ll repeat what I wrote last quarter, it is the most reasonable time to visit the UK in a generation. Go pack your bags and take a trip!
You can read our 2016 Second Quarter Global Market Viewpoints here.
Andrew Comstock, CFA
Please contact me at 913-660-0708 or by email to discuss your financial planning and investment management needs. You can sign up for our monthly newsletter here. Follow me on Twitter @CastlebarAM.
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.