When looking back at 2015 one thing is particularly notable: the behaviour patterns of investors and the volatility of the market differed so much between the first and second halves of the year.
For most major Western stock markets, the first half was a continuation of the bull run that began out of the ashes of the global financial crisis in 2009. By May, however, momentum was slackening – indeed reversing in the UK and the US – exacerbated by significant pressure on company profits and balance sheets in the energy, mining and materials sectors as global commodity prices collapsed.
The slowing rate of growth in China, the world’s second-largest economy and for many years the marginal consumer of many of the world’s commodities, was the chief catalyst. The devaluation of China’s currency in August further undermined confidence, prompting a six-week period of significant volatility in stockmarket prices.
After good first-half gains, it was disappointing to see the S&P 500 index close the year down 0.8 per cent and the FTSE 100 index lose 5 per cent over the 12 months. Bond markets also experienced volatility, particularly in Europe, where the distortion of quantitative easing drove prices up and yields down (many eurozone sovereign bond yields even turned negative), causing income-hungry investors to look at riskier assets for satisfaction.
The final weeks of the year saw a much-awaited policy announcement as the Federal Reserve at last raised US interest rates. This was a milestone on three levels: it is the first change in US rates for six years, the first increase for nine years and, in combination with an earlier announcement by the European Central Bank, is the first time in two decades that European and US rates have headed in opposite directions.
So, what can we expect from markets this year? First, it is important to note the state of the world does not change simply because the calendar flips to January. All eyes remain on China, where the consensus is the economy should gradually respond to falling interest rates and currency management. Nevertheless, official Chinese growth is likely to continue to slow from around 6.9 per cent to nearer 6.5 per cent in 2016.
The UK and the US remain in relatively good shape overall, albeit the rate of economic expansion in both countries has lost some of its acceleration.
US interest rates are expected to rise again this year, possibly at quarterly intervals. Depending on inflation, the UK may or may not follow suit. Whatever the outcome on timing we remain of the opinion that rates in both countries will remain lower for longer.
Elsewhere, anaemic eurozone growth rates are improving very slowly from a low base and quantitative easing remains in place until March 2017. Japan, still struggling to throw off more than 20 years’ worth of economic stagnation and deflation, should see its economy expand modestly by around 1 per cent, again helped by its own massive QE programme.
On the other hand, many emerging markets, in particular those heavily reliant upon oil production (for example, Russia, Venezuela, Brazil and Nigeria), will remain in deep trouble with rapidly shrinking economies. Those reliant upon trade with China are also likely to remain under pressure.
The US election takes place in the autumn – the outcome of which is unpredictable at this stage, not least with the presidential candidates and their running mates still to be determined. Here, the 2017 EU referendum draws inexorably closer.
As well as providing a ceaseless torrent of commentary and speculation, it could start to have ramifications for sterling. In the eurozone, the political consensus will continue to be tested not only by Brexit and negotiations for reform but also by the debate over mass migration and the gradual polarisation of political opinion.
John Chatfeild-Roberts is head of strategy for the Jupiter Independent Funds Team