- The 2015 calendar year marked the beginning of a transitional period for financial markets which is likely to continue well into 2016. Many countries are undergoing fundamental changes as old economic growth models are reformed. This has led to a slowdown in global economic growth and a divergence in economic policy around the world.
- China underwent the most publicised shift during 2015. China remains in the process of transitioning its economy away from manufacturing and investment to services and consumption. This will cause economic growth to slow in the short to medium term as the economy adjusts and will likely require a further depreciation in the currency to support the economy. Whilst it was an eventful year, the Chinese economy still managed to grow at 5.9%.
- In contrast, the US economy continued to pick up pace, allowing the Federal Reserve to embark on its first interest rate rise in over nine years during December. The increase was in response to continued strength in the US labour market and a generally robust economy which grew at around 2.5% during the calendar year.
- The Australian economy remains in the middle of its own transition. The dominance of the mining sector is declining and slowly being replaced by areas such as construction, tourism and other services. The chart below shows the significance of mining to the economy over the last decade. Mining capital expenditure is now starting to decline, with non-mining capital expenditure beginning to trend up.
- The slow down in the mining sector continued to weigh on the economy during 2015, prompting two interest rate cuts by the Reserve Bank of Australia (“RBA”) to support the economy. As a result, economic growth remained robust at 2.3%. Lower interest rates also pushed the Australian dollar lower by 10.89% from $0.81 to $0.72 during the year, assisting exporters and companies with foreign earnings.
Cash and Fixed Income
- Australian interest rates decreased by 0.50% to 2.00% during 2015 as the RBA continued its measured approach to stimulating the economy. The cuts were confined to the first half of the year with the RBA taking a more “wait and see approach” in the second half as uncertainly in China unfolded.
- The RBA remains willing and able to act with additional interest rate cuts should any global or domestic issues begin to impact the local economy. Australia still has comparatively high interest rates by global standards and scope remains to stimulate the economy via further interest rate cuts if required. The chart below shows that most global interest rates are anchored at or near zero.
- The Australian fixed income sector provided a total return of 2.59% during the year. Whilst the return on the sector appears modest in absolute terms, the sector outperformed domestic equites. The sector continues to provide valuable portfolio diversification during times of equity market volatility. The sector generally delivered positive returns in months when the domestic equity market was negative.
- The global fixed income sector also highlighted its defensive qualities during 2015, with a total return of 3.35%. Investors continued to use US fixed income, in particular government bonds, as a “safe haven” during periods of increased volatility. This was particularly evident during the second half of the year as uncertainly increased post China’s decision to devalue its currency in August. A detailed discussion of the Chinese devaluation and its implications can be found in our August market update here.
- The Australian equity market started 2015 well with the SP/ ASX 200 attempting to close above 6000 during March and April, with sentiment buoyed by consecutive interest rate cuts by the RBA. The market was eventually overcome by volatility in the Chinese equity market and currency. The prospect of slowing growth in China caused a severe correction in commodity markets, pushing the Australian market lower in the second half of the year. A detailed discussion on the Resource sector can be found in our December market update here.
- Most of the damage to the Australian market was done in August as commodity prices declined post the Chinese currency devaluation. The market tracked sideways for the rest of the year to finish up 2.56%. The Energy and Resources sectors were the worst performing sectors, declining 27% and 25% respectively. The best performing sectors were well supported for their defensive qualities, with Utilities increasing by 22.80% and Industrials and Health Care increasing by around 16%.
- Global equities rose by 3.83% during 2015 on a currency hedged basis. Unhedged global equities were able to enjoy the full benefit of the falling Australian dollar, posting a return of 11.80% for the year. Global equities began 2015 on a positive note, only to be eventually overcome by developments on the global stage.
- Uncertainty began in July with a return of the Greek debt drama. This issue was eventually resolved after bailout agreement was made between Greece, the European Central Bank (“ECB”) and International Monetary Fund. The ECB provided additional monetary stimulus during the remainder of 2015, supporting a rise in Europe’s main market, Germany, of 8.56%.
- The US ended the year relatively flat, with the SP500 returning -0.93%. The market was constrained for much of the year as investors speculated on when and by how much the US Federal Reserve would life interest rates. The US market also suffered from events in China during August, however, comments from the US Federal Reserve provided sufficient stability to allow for the interest rate increase in December.
- The Chinese equity market finished the year 5.58% higher. The positive performance masked a volatile period, with the market first rising 150% before suffering a correction. Unfortunately, much of the volatility was caused by Chinese authorities attempting to stabilise the market. The major causes of the volatility in the Chinese equity markets was discussed in our recent market update here.
- It is important to remember that the Chinese equity market is still immature by most global standards and its underlying movements are not particularly reflective of the underlying economy. The market still requires significant reform to reach a level which reflects international standards. The market is still largely driven by speculators and there remains significant scope to improve research, governance and other operational aspects.
- Hedge Funds and other alternative investments strategies also provided important portfolio diversification during 2015. The Barclays CTA Index finished the year in positive territory, increasing by 1.62%. Hedge funds were one of the few areas of the market which were able to implement strategies which benefited from the falling oil price. Hedge funds generally exhibit as negative correlation to equity markets over the medium to long term and this was evident during 2015.