It’s a wrap!
2016’s investment ups and downs
This year delivered a number of surprises in sports, politics and finance which caught many bookies, economists and political pollsters on the wrong side of the results.
Financial markets had a tough start to the year as Chinese stock market madness continued to unravel, souring investor sentiment and pushing global stock markets into a sharp correction. The S&P 500 was down just over 10 per cent as the commodity collapse continued with oil reaching a low of $25.73 per barrel. US stocks along with oil marked their lows on the 11th of February rallying a whopping 24.1 per cent and 103.2 per cent respectively since then.
A turnaround in investor sentiment in February proved to be an important inflection point in commodity and equity markets. We will highlight some the most important turnarounds that occurred in 2016 that could shape the future.
Decline in commodity prices may be over. Price movements across the commodity spectrum from energy and resources to agricultural, suggest falls may have bottomed out. This is good news for many emerging market economies hard-hit by the sharp declines since the 2011/2012 peaks.
The Bloomberg Commodity Index is up 20.9 per cent year to date. Domestically we have seen a significant improvement in dairy prices with higher prices in 8 out of the last 9 auctions, a welcome relief for farmers. The New Zealand Dollar remained firm as a result +4.89 per cent against the US Dollar and around 30-year highs against the British Pound. Across the ditch, iron ore prices have recovered and trading around two-year highs.
Many pundits have pointed to the Trump reflation trade as the genesis of the about-face of the markets on inflation, however, there has been clear evidence that inflation has been building in the system well before the US election results and the proposed infrastructure spending became more of a reality. The recovery in oil may also suggest that energy deflation may be over. Many central banks are now forecasting inflation to move back within their targeted levels over coming quarters.
Since the onset of the GFC, we have had more than 670 interest rate cuts by central banks around the world, with some even experimenting with negative interest rates. With rates in most developed economies including New Zealand at all-time lows, this trend may also have run its course. This is an important development for the wider market as it impacts the price of money, and for many, debt around the world. It may also impact the great search for yield among investors who have been taking more risk, having had to accept lower returns in property and stock markets in order to generate some income.
Public sentiment. We may have witnessed a tipping point in public sentiment this year with The Brexiteers winning the majority vote to exit the European Union, and Trump, the wildcard entry to the US Presidential race, getting the nod.
Across Europe, the antiestablishment voices are growing louder and we could see further fragmentation in Europe and a possible breakup of the union in the future.
Despite dire predictions, the UK and US stock markets have been the best performing major markets this year. US markets have rallied more than 10 per cent since the November election. The well-known ‘‘Santa rally’’, along with the ‘‘presidential rally are expected before January. All this activity ensures this Christmas promises gift wrapped opportunities for traders and investors alike.
We have witnessed a tipping point in public sentiment this year.