2016; fasten your seat belts

Global markets have been on a rollercoaster ride since the opening sessions of 2016. The brutal volatility spared no-one. Equities, currencies, commodities, bonds (both investment grade and high yield) all went through massive price movements over short periods of time.

The events were triggered by fears that an economic slowdown in China would be dragging the rest of the world into a global recession. This was fuelled by the impression that Chinese authorities had lost control. The final nail on the coffin to the risk off environment was a spectacular collapse in oil prices that, while supply driven in nature, has been associated with slowing demand throughout.

Pessimism was somewhat dampened mid-way through the month, ECB President Mario Draghi acknowledged that market conditions deteriorated since the December meeting, making particular reference to the fact that the threats to the single currency region’s recovery have escalated and hinted at a review of Quantitative easing measures in March.

The Federal Reserve continued with the same tone in the inaugural Fed meeting of 2016 with the likelihood of a March rate hike being pushed further down the road. Towards the end of the month, the Bank of Japan surprised markets by cutting rates on excess reserves to -0.1% in the latest global dovish central bank move.

This dovishness in the latter part of the month sent risky assets higher, helping them partially recoup their losses in the beginning of the month. In this vein, the European and US HY bond markets dropped by 0.91% and 1.24% respectively. European Equites dropped by 6.7%.

At these levels, investors need to remain aware and alert that there has been no significant change in fundamentals, neither expectations of such change in the imminent future. This time round, investors would not be at fault to tread with an element of caution and build exposures to those sectors which, in the short term, could withstand market turmoil.

The current correction may be viewed as an investment opportunity especially in equity markets. A surprise increase in Quantitative Easing by the European Central Bank in March and especially stable economic data from China would push European Equities higher. On the other hand, the uncertainty surrounding the global economic recovery is the main risk to our base scenario.