Monthly Market Snapshot January 2016
Written and accurate as at: Feb 03, 2016 Current Stats & Facts
Market Commentary
- It was a tough month for financial markets in January. Financial markets across the board, but particularly equity markets, have experienced some significant falls with investor risk aversion remaining high. Through January the local equity market (S&P/ASX200) was down -5.5%, with the Materials (-9.5%), Financials (-7.4%) and Energy (-6.2%) sectors leading the declines.
- The decline in the local market has mirrored offshore global equity markets with the MSCI World Index down -5.5% (in LCT) in January, while Asian markets were smashed, with the Chinese Shanghai Composite Index down -22.7%, pushing global EM indices lower. For AUD investors the decline was less severe (-3.2%), assisted by the depreciation of the AUD (-2.3%), with the currency ending the month around $US0.70. The AUD is now down -8.7% over the last 12 month period against the USD, and we continue to see downward pressure on the currency in the near term.
- On the flip side, bond markets have shown remarkable resilience with yields pushing lower across the major markets. Where there has been divergence in global bond markets has been in relation to emerging markets where yield movements have been impacted by the global growth outlook and the impact of a lower Chinese currency.
- However, the backdrop for the recent move in financial markets is not new in our view, but reaffirms some of the core macro issues that remained through the latter stages of 2015 that have spilled over into 2016. We would classify these into three key areas; (1) the impact of the US rate hikes and stronger USD, (2) the Chinese growth outlook, currency shifts and commodity demand, and (3) the future direction of policy support for their economies by both the European Central Bank and Bank of Japan.
- In regard to commodity markets while we have seen some stabilisation in iron ore prices in recent periods (~US$42), we believe downward pressure on energy prices will continue near term, particularly since the OPEC cartel seems to have fractured coupled with Iran’s ability to now export oil. Additionally, when combined with weaker demand from China the fundamental outlook for commodity markets remains challenging.
- The start of 2016 has been challenging one and we expect that market volatility will remain elevated through the 1Q16. Despite the pullback in equity markets we still see valuation opportunities both domestically and globally, and on a relative basis (to bonds) maintain our equity overweight position. The upcoming February reporting season will also provide a good indicator as to the outlook and growth trajectory of corporate Australia. While globally markets will continue to focus on the macro themes and policy response.