2015: The Year Of Divergent Monetary Policies and Falling Commodity Prices

Published on 07 Jan, 2016

Global Investment Research

Monetary Easing Provided Initial Thrust to Equities

Global markets commenced 2015 with a strong positive momentum.

The markets were optimistic due to the larger-than-expected stimulus announced by ECB President Mario Draghi to lift the sagging Eurozone economy and the likelihood of a delay in the US interest rate hike.

China’s SSE Composite Index recorded outsized gains of over 59% on June 12, 2015, after PBoC announced monetary easing measures to support the economy.

Eurozone benchmark DAX and CAC40 peaked with YTD gains of +26.2% and +23.3%, respectively, in April. US benchmark indices S&P500 and DJIA peaked with YTD gains of +3.5% and +2.7%, respectively, in May.

Volatility and Uncertainty Reverse Gains

Mid-2015 was challenging for global markets as support measures undertaken earlier failed to produce results and optimism gave way to concerns over global growth.

The Greek debt crisis severely affected the Eurozone, resulting in investors contemplating the repercussions of a Grexit. Meanwhile, overvalued Chinese equities commenced downward correction, entering the negative territory to touch its 52-week low of 3,235 (-9.5% YTD) on August 26, 2015. This added to pressure on global equities.

The sell-off in global equities intensified due to uncertainty over the US interest rate hike in September.

Germany’s DAX erased all gains and entered the negative territory, touching its YTD low of -3.9% on September 24, 2015. All other indices traded near 52-week low.

Light at the End of the Tunnel — US Interest Rate Hike

A continuous decline in commodity prices kept denting the GDP growth estimates of commodity-export-dependent nations, especially Latin American and Middle Eastern economies. This resulted in fiscal pressure on governments. However, the Federal Reserve interest rate hike allayed investor anxiety near the end of the year. Investors cheered the US interest rate hike, expressing confidence in the gradual US economic growth as indicated by a surge in global equities.

The DAX (+10.0%), CAC40 (+8.5%), Nikkei225 (+9.3%) and SSE Composite (+9.4%) rebounded to end 2015 in the green. DJIA (-2.2%), S&P500 (-0.7%), and FTSE100 (-4.9%) recovered from their lows, but ended in the red.

Commodities Outlook for 2016

The positive momentum is anticipated to continue in 2016, led by recovery in commodity prices from multi-year lows. The US economy is expected to provide impetus to export-dependent economies and help in gradual recovery of global growth.

Commodities Outlook 2016

Commodities Outlook 2016

OPEC’s Double-edged Sword — The Fall of Oil Prices

The struggle between the US and the OPEC to dominate the oil market intensified in 2015.

OPEC Gulf indices exhibited a strong correlation with oil prices (0.65–0.90x), largely dictating investor sentiment in the region. The year began positively as oil prices stabilized momentarily and strong corporate earnings were reported for 2014. YTD gains peaked at 3–18% in the first four months of 2015, with the TASI outpacing the rest.

GCC markets started gradually retreating mid-year, tracking the downtrend in oil prices. Investor sentiment deteriorated, following political unrest in Yemen and disappointing corporate earnings for 1Q15. Resultantly, YTD gains entered the negative territory, as oil prices hit a seven-year low of around US$42.7 per barrel on August 24, 2015, down 33% in two months.

Meanwhile, Saudi Arabia lifted restrictions on direct foreign investments in the Tadawul on July 15, 2015. However, the negative global environment deterred investors; trading volumes remained at a record low in most Gulf markets as oil struggled to find its bottom.

Thereafter, in the absence of positive catalysts, the markets kept falling to end 11.7–23.6% lower as of December 13, 2015 with credit downgrades of Saudi Arabia, Oman and Bahrain by S&P continue to exert pressure on the markets.

Austerity Measures and Reforms — The Essential Compromise

The US interest rate hike in mid-December lifted global sentiment, followed by a rebound in Gulf markets, leading to 2015 ending on a positive note. In addition, analysts welcomed reforms introduced in the 2016 budget announcements by the respective state governments to curb the widening fiscal deficit with focus on the long-term gains over short term pain.

The Saudi government implemented austerity measures including a 125% hike in the price of water, 50% hike in petrol prices, and the imposition of a 2.5% tax on underdeveloped land, to contain the fiscal imbalance.

Among sectors, petrochemical, energy and real estate witnessed sharp drops during the year. Banking stocks helped the markets contain losses amid anticipation of better lending margins, following the US interest rate hike.

GCC Outlook for 2016

We expect the beginning of 2016 to be challenging for Gulf nations due to record low oil prices and reforms (in the form of austerity measures) inhibiting economic growth. Nonetheless, with an emphasis on diversification and anticipated recovery in oil prices, GCC is expected to make a recovery in the second half of 2016.

GCC Outlook for 2016

GCC Outlook for 2016