Equity, bond, commodity markets, the return of volatility

Didier Bouvignies and Philippe Chaumel, co-CIO at Rothschild & Cie Gestion and Portfolio Managers of Rothschild's conservative mixed fund R Alizés, look back at 2015.

2015 was rich in both monetary and economic events. The news was dominated by the actions of central banks and their impact on foreign exchange markets. Early in the year, the Swiss National Bank decided to unpeg the Swiss franc from the euro, causing a brutal 20% revaluation of the Swiss currency. In August, the Chinese central bank surprised the markets by changing the ranges in which it allows the yuan to fluctuate against the dollar, raising fears among investors, now considered excessive, of a currency war. The past year was also marked by the expected desynchronising of ECB and Fed monetary policies: the first decided in January to initiate an ultra-accommodating policy with the purchase of €60 billion in assets per month whereas, in December, the latter ended the cycle of rate cuts it had pursued since September 2007 by increasing its key rates by 25bp.

Largest migratory flow in Europe since WWII
Europe wasn't spared politically: in addition to a rerun of the Greek melodrama at the beginning of the summer, fortunately resolved by German firmness and Alexis Tsipras' acceptance of the constraints imposed by the Eurogroup, growing regionalism in Spain, strong rejection of traditional political parties, including to a certain extent in France, and the creation of unstable governments in Portugal and Spain contributed to investor concern, notably toward the end of the year. The most significant outcome of the many conflicts in the Middle East was the arrival of millions of migrants, primarily in Germany. This was the largest migratory flow in Europe since the Second World War. In the rest of the world, Brazil saw an impeachment procedure against Dilma Rousseff and the recent departure of its finance minister. A nuclear agreement was reached with Iran, leading to the end of the embargo.

From an economic standpoint, the Eurozone was the exception in a climate defined by downward revisions of global growth prospects, notably due to emerging countries. While Brazil was ending 2015 with a 3% contraction in economic activity, the Eurozone revised its growth upward by 0.3% to 1.5%, carried by positive surprise performance from Spain, with additional growth of 0.3%, to 3.2%, and a slight upward revision of the consensus on activity in France and Germany. The uncertainty regarding China's growth rate and the potential impact on emerging and developed countries clearly dominated the markets in the second half. At the sector level, construction and industry were particularly impacted, whereas services continued to be dynamic.

The raw materials market suffered a great deal, particularly oil. Brent retreated a further 17% over the last month for a total of 37% since the beginning of the year, following a 48% decline in 2014. Black gold continued to be penalised by weak demand and growing availability sustained by increased production in Iraq, the return of capacity in Iran, increased productivity from shale oil producers in the United States and steady production levels by OPEC.

A number of stock markets ended 2015 in negative territory in local currencies, penalised by the raw materials segment. This included Brazil which contracted by 13.3% and the English market which retreated by 1.7%. In the United States, the stability of indices was due in large part to the excellent performance of major technology shares. An equally weighted global index of stocks and bonds yields a performance of -0.5%, the weakest since 2008! Performance was also disappointing in Spain (-6%), which was impacted by political uncertainties and the exposure of a large number of companies on the Ibex index to Latin America.

In the bond universe, the American market shone thanks to the stability of its 10-year rates despite a climate of short-term rate tension. This reflected anticipated monetary flexibility on the part of the Fed. In Europe, 10-year rates returned to levels seen at the beginning of the year after reaching rock bottom at 0.07% on April 20th. The increasing share of European bonds with negative rates (€1700 billion) illustrates a market which remains risk averse and subject to significant concerns about deflation. The Eurozone credit obligation index ended the year at the same level as it had started. The slight tension in spreads negatively offset the drop in benchmark sovereign rates.

A year full of surprises
Overall, as we have shown, the year was full of surprises. The general tone revealed a negative bias which explains the modest performance of the markets. The net outperformance of Eurozone stock markets in local currencies and the gains generated by the currency effect (10% increase in euro/dollar parity) on international markets enabled European investors, particularly those invested in French assets, to record satisfactory performances.

The outperformance in Eurozone markets originated in an economic environment which was less disappointing than in previous years Companies were able to improve their results by 11% in 2015 and the risk premium for shares compared to other assets remained quite high.

Of course, many open questions remain for 2016. We should note the issues arising from the situation in China, the consequences of monetary policy changes in the United States, the Eurozone’s ability to maintain growth following the weakening of the positive effects of the higher dollar, low rates and the fall in the price of the barrel of oil.