Review
«Forgetting belongs to hope.»
(Sigbert Latzel, German philosopher and writer)
2015 began with high hopes, but ultimately it was a year to forget. The most important assets experienced low single-digit or even negative growth.
Only once since the 2008/2009 financial crisis has the MSCI World, the global benchmark for equity market performance, experienced a worse year than 2015. Whereas in 2011 it was primarily political concerns surrounding a renewed European debt crisis that weighed on investor sentiment, in the past 12 months it was the central banks that provided the source of disillusionment.
For some, the Swiss National Bank (SNB) acted too hastily by abolishing the minimum exchange rate of 1.20 francs per euro on 15 January, while others felt shackled by the US Federal Reserve, which again delayed the first interest-rate raise since 2006. So when the Fed finally took action in mid-December and reversed the trend with a 25 basis point interest-rate hike, uncertainty among market participants grew so intensely that the traditional year-end Wall Street rally failed to materialize.
Commodities suffered the biggest losses over the past year. Brimming oil tanks and the anticipated return of Iran as a substantial supplier on the global market caused prices for European Brent Crude to plummet by more than 30%. The volatile geopolitical situation, which finally culminated in the shooting down of an airplane between historic enemy states, amazingly failed to provide any impetus to precious metals. At the end of December, gold and silver were down by more than 10% on the previous year – the weak inflationary outlook seems to overshadow other developments and appears to have a negative impact on precious metal prices.
The currency market also experienced sharp price corrections akin to those seen in commodities. However, as the year progressed, the Swiss National Bank could no longer be blamed: the euro fell 10% against the franc, although this was not entirely due to the removal of the minimum exchange rate. The single currency suffered even heavier losses against the dollar, resulting in a flat year for Americans invested in Germany’s leading DAX index. In short, the euro was weak against all other major currencies in 2015.
Outlook
«Hope harms resignation.»
(Walter Ludin, Swiss theologian and author)
It is unclear exactly where positive stimuli for the financial markets will come from this year. On the one hand, financial literature suggests that the outlook for the world economy remains remarkably bearish. Yet on the other hand, the equity markets are showing signs of cautious optimism, for want of other alternatives.
With the hope that equities might diverge from trends in the broader economy and interest-rate developments in the US, the financial community is clearly trying to stave off feelings of resignation. We think this argument certainly carries some weight, particularly as long-term historic data shows that equity markets only rarely mirror wider economic developments. Although the correlation is disappointingly small, it is undisputed that equity market developments frequently anticipate developments in the real economy. However, our support for the divergent equity market theory ends at the very latest with an observation of the fundamental macroeconomic environment.
Further interest rate moves from the US Federal Reserve will widen the gap between US and Eurozone monetary policy and increase stress on the financial markets. Equities are not cheap, and in spring 2016 the equity markets would enter their eighth bull year. Since March 2009, equities have known only one direction – up – as they continue to elude the bear market (defined as a 20% downward correction).
| Asset Class | Index | Return 3 months, per 31.12.2015 | Return 12 months, per 31.12.2015 |
|---|---|---|---|
| Equities World | MSCI World Net USD | 5,50% | -0,87% |
| Equities Switzerland | Swiss Performance Index | 4,77% | 2,68% |
| Bonds World | JPM GBI Global Traded TR USD | -1,15% | -2,61% |
| Bonds Switzerland | Swiss Bond Index AAA-BBB TR | -0,09% | 1,77% |
| Commodities | Thomson Reuters/Jefferies CRB TR USD | -9,00% | -23,30% |
| Real Estate Switzerland | SXI Real Estate® TR CHF | 2,80% | 4,17% |
| Exchange rate EUR/CHF | 0,00% | -9,55% | |
| Exchange rate USD/CHF | 2,92% | 1,24% |
- Our prospective risk indicators still show an above-average risk concentration and therefore urge caution.
- According to a survey by the industry organization Swiss Funds Association (SFA), the ratio between capital invested in equity funds and capital invested in bond and money market funds stood at 101% in November. Since data was first recorded 20 years ago, we have observed 14 instances in which this value was above 95%. Our analysis shows that a positive annual return on the Swiss Performance Index (SPI) has never followed in any one of these instances. The average loss over the following 12 months was 21%.
- If investors hold a high proportion of equities at the start of the year, they must be prepared to lag behind the bond indices. Data from the Swiss National Bank indicates that the equity quota in January 2016 will be between 40 and 45%. This means that equity performance will be on average 4% weaker than that of bonds after 12 months.
- Different indicators taken from technical analysis point to the fragility of the global markets. In comparison to their moving average, the values of many equity and bond indices suggest the likelihood of a downward trend. The globally calculated advance-decline line, the relationship between equity winners and losers, also shows marked signs of fatigue.
Global financial markets – review
(See previous table)
Equities
Only investment in individual equities could perhaps have prevented an equity portfolio loss. The worst performance was experienced by investors in emerging markets (–15%) and Hong Kong (–7%). The highly diversified US S&P 500 index and the global MSCI World both ended the year virtually unchanged (–1%). In the indices that did record gains, FX losses resulted in a zero-sum game for franc-denominated investors. Although Germany’s DAX was up 10% and the MSCI Europe 8%, the euro depreciated 10% against the Swiss currency. Among the major indices, only Japan’s Nikkei bore fruit with an increase of 9%.
Bonds
Bond indices appear to have surpassed their 2015 highs. They remain close to historic highs, equating to yields around the zero mark. The Swiss Bond Index, which contains franc-denominated bonds rated BBB to AAA, posted a 2% year-end return. The globally diversified JPM GBI Global Traded bond index has already lost 3% over the last 12 months.
Commodities
Commodities were 2015’s biggest loser. The Thomson Reuters Core Commodity index fell to a level last seen at the low point of the dotcom bust in spring 2003. Oil suffered the heaviest losses, with Brent now trading 67% lower than its price two years ago.
Real estate
Swiss real estate funds posted a 4% return, thereby outperforming both equities and bonds. Investors with dollar-denominated real estate assets performed slightly better – US real estate added 5% to the portfolios of franc-denominated investors.
Currencies
Market moves in the final few hours of 2015 resulted in a small profit for the dollar/franc currency pair. The dollar’s renewed appreciation cemented the weak development of the euro against the US currency (–11%) and the franc (–10%).
