OUT WITH THE OLD, IN WITH THE OLD
As thoughts drift towards 2016 themes, we find ourselves drawn back towards many of the same concerns and challenges that have tested the markets over the past several months. In particular, last year was punctuated by anxiety over the impact that monetary policy divergence would have on global growth and whether the efficacy of non-dollar stimulus could replace tightening conditions from the Fed. While the Fed’s actions in December were the most widely telegraphed rate hike in the history of central bank actions, its potential impact on global monetary policies and, by association, asset values remains fluid. We have argued that generally rich global asset values and the unknown impact from changing capital flows would, at a minimum, result in heightened volatility in 2016, while also creating a challenging returns environment. In many ways, this view mirrors last year’s overall market environment, where returns were scarce amongst several bouts of heightened volatility. As the table below indicates, returns for both equity and fixed income indices were mostly flat to lower in 2015. While these returns were not earth shatteringly negative, the path to low returns did not lack drama, with major moves followed by major reversals throughout the year. For instance, the DAX posted a 22% gain in 1Q:15, which eroded into negative territory by 3Q:15 only to finish with a 9.6% gain in local currency terms. The S&P 500 also hit successive all-time highs over the summer but finished slightly in the red by the end of the year. Energy and materials were the weakest performing groups, held down by collapsing commodity prices and concerns over global growth, while discretionary, health and information technology were the positive standouts. EM bourses struggled throughout the year, as the stronger USD and lower commodity prices had a disproportionate impact on economic growth and flows. Commodity driven EM equity markets illustrate the challenges faced by these markets with Toronto, Mexico and the Bovespa falling 25%, 15% and 42% in USD terms last year. China equities, which became the center of the storm during 2H:15, saw its stock rise 60% through June, fall into negative territory in September before finishing with a 9% absolute gain and a 4% USD converted gain.