Our Opinion: 2016

A volatile start to 2016

2016 began on a sour note for global equity markets. A 7% fall in onshore Chinese shares brought a halt to trading and led to broader equity weakness across Asia. This morning has seen similar falls, triggering the “circuit-breaker” rule that is designed to stop panic selling. That came in the first 30 minutes of trading, making it China’s shortest trading day on record. The slump prompted renewed panic on global markets.

Meanwhile, rising tensions between Saudi Arabia and Iran have added to global risk. At the same time, US data points to the slowest pace of manufacturing activity since 2009. These developments over-shadowed more positive news from the Eurozone, and has led to a sharp sell-off in global ‘risk’ assets, and a rise in safe-haven investments such as government bonds.

Our strategic partners, UBS (The Union Bank of Switzerland) believe that the outlook for equities remains positive, supported by solid economic growth in the developed nations, and rising corporate profits. But the unusually turbulent start to 2016 trading sets the tone for what is likely to be another volatile year. Eurozone and Japanese equities look attractive, together with European high yield bonds.

The 14% slump in onshore Chinese equities appears to have been led by technical factors, as government efforts to prop up the market from the summer of 2015 draw to a close. A sharp fall in the Chinese currency against the US dollar added to investor anxiety.

Mixed economic data may have also contributed to negative sentiment. The Caixin manufacturing purchasing managers‘ index (PMI) fell below expectations, signaling the 10th consecutive month of contraction. Still, the data did not mark a significant deterioration and other measures, such as retail sales, remain robust.

Oil markets were further unsettled by Saudi Arabia’s decision to sever diplomatic links with Iran following demonstrations over the execution of a Shia cleric. Bahrain, Sudan, and the United Arab Emirates also scaled back diplomatic ties with Iran. Investors were further troubled by the Islamic State’s territorial encroachments in Libya, which are nearing oil installations.

Against this uncertainty, services sectors continue to perform well globally, while manufacturing remains troubled.

China’s growth is slowing, but it is transitioning toward a consumer-led economy. Growth in the developed markets is uninspiring but positive. The sharp decline in oil prices is creating dislocations in some credit markets, but ultimately should benefit consumers. Emerging markets remain beset by political concerns and issues with their cost of financing, but this is unlikely to translate into crisis.

2015 has been challenging for global markets. Global bonds fell by 3.3% and global equities by 4%.

2016 will have real challenges too: the US presidential election, Brexit, a migrant crisis in the EU, and an economic crisis in Emerging Markets. These unpleasant political surprises will certainly bring drama to global markets, and investors will need to ensure they are continuing to benefit from the highest standards of independent advice.