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Good morning,
Looking back at 2015, there were a lot of events during the year that created volatility in equity markets. Below are is a list of these events.
Quantitative Easing in Europe
On 22nd January 2015, the ECB announced quantitative easing in Europe with combined monthly purchases of €60 billion. The purchases intended to be carried out until at least September 2016.
For 1st January 2015 till 1st April 2015, the Euro Stoxx 50 was already up 22% for the year as investors kept on adding to positions sending P/E multiples sky rocketing as analysts re-examined valuations factoring in an improvement in economic data in the Eurozone.
Grexit
The initial rally at the start of the year seemed too good to be true. It was the Greeks that initially dampened the enthusiasm in equity markets and sent investors into risk-off mode. The Greek drama also took a long time to solve creating further volatility in equity markets.
From the highs in April, the market gave up 14% of it gains due to the Greek saga, shaving off most of the gains at the beginning of the year.
Though when it became evident that the Greeks had no choice but to take what’s on the table to stay in the Eurozone, investors went back into rally mode adding back
12% to the performance of the Euro Stoxx 50.
By mid-July, we were only 3.5% away from the highs of the year. Investors were once again confident everything was going to plan in the Eurozone with quantitative easing underway and Greece remaining the monetary union.
Chinese market crash
At the beginning of August, we started to see strong selling pressure coming from China. This was due to data showing that the Chinese economy was slowing down.
The heavy selling was a result of a strong rally in Chinese equities in the first half of the year.
From the beginning of the year till mid-June, the Shanghai composite was up 60%. There was no doubting that a bubble was formed in Chinese markets. All you needed to do was take a look at the sky high PE multiples companies were trading on.
The heavy selling led to a 43% drop in the Shanghai composite. The market crash in China coupled by weak economic data led to a sell-off in equities across the global.
The Euro stoxx 50 lost 18% from the beginning of August till end September making it one of the hardest summer for equity markets.
Markets optimistic about more quantitative easing in Europe
Moving into October, after having been through a difficult summer in equity markets, markets started to rally again.
The slowdown in China was priced in and investors were confident that the ECB will increase quantitative easing in Europe. This set the start of another rally in equity markets all the way till the 3rd December when the ECB was expected to announce further quantitative easing.
3rd December 2015 – Draghi doesn’t deliver
On 3rd December, Mario Draghi did not increase the asset buying program of the ECB and left it at $60bln per month. The Euro Stoxx 50 lost 6% after the announcement as PE multiples ones again started to look expensive prior to the meeting, hoping that more quantitative easing will come.
4th December – OPEC meeting
OPEC does not cut down supply of crude oil. This sends the price of crude below the $40/bbl. With a situation of heavy over supply and suppliers not looking at cutting down on production, there seems to be no bottom in sight for the price of crude.
Due to the oil and gas industry forming part of the overall market, equities in the energy sector continued to tumble, putting pressure on the overall market.
What’s next? – Rate hike in the US?
Markets are now looking for what’s going to happen on the 16th December. Last Friday, US markets rallied strong as jobs data came out strong but wage growth showed no sign of a recovery. So the market interpreted this as a positive sign because the rate hike will not pick up stream.
What’s on the cards for 2016?
A strong Dollar and weak commodity prices are here to stay. With European sovereign debt yielding very low levels, investors will look at the equity markets for positive
returns in 2016.
With central banks ready to pump additional liquidity if economic data starts to falter, I remain confident that European equities will continue to benefit in 2016.
Good day and happy trading!
Kristian Camenzuli
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