Ripples in the water

A wide range of political and economic issues have impacted markets over the course of 2015, with regional economic trends and policies diverging as we move into the new year.

The political situation in Greece dominated investors' thoughts at the start of the year, with the sustainability of its eurozone membership coming under intense scrutiny. The left-wing (anti-austerity and anti-bailout) Syriza party secured 149 out of 300 seats, formeding a coalition government with the right-wing Independent Greeks party, with the leader of the Syriza party, Alexis Tsipras, becoming the country's new prime minister.

This result stoked fears that the bailout conditions that Greece had previously agreed with its creditors would be disputed and that the country would be forced to leave the eurozone as a result. Despite this, European finance ministers ultimately agreed to extend Greece's bailout programme until June.

As July approached, uncertainty surrounding the chance of another extension to the bailout programme being agreed caused asset markets to sell. This situation intensified as negotiations on a deal collapsed, with Greece rejecting its creditors' demands. Tsipras was subsequently forced to call an emergency referendum on whether to accept its creditors' proposals, which ultimately led to the government conceding to its creditors' demands, thereby securing a further extension to its bailout.

Despite the headlines and decline in sentiment in the run up to July, contagion between asset markets was greatly reduced in comparison with the eurozone debt crisis of 2010. This reflected the stronger state of Europe's financial system, supportive policy stance of the ECB, and recent reform-associated progress made by other indebted European nations, while after the bailout was agreed in July, asset markets rallied.

Ripples from east to west

As we moved into the third quarter, investors began to focus on events in China. The Chinese stock market had risen by around 70 per cent in the first half of 2015 (in local currency terms), in line with a rise in unregulated equity margin financing. However, this trend had begun to reverse in the third quarter of the year as China's regulators began to crack down on such practices, while the slowing of the Chinese economy was also weighing on investor sentiment.

In August, although China's GDP growth data met the government's reduced target of seven per cent (down from 7.5 per cent a year ago), investors were spooked by the People's Bank of China's (PBoC) surprise decision to stimulate the economy by reducing the renminbi's peg to the US dollar. This led some to question whether China's regulators were concerned that the economy was in the process of undergoing a hard landing, and culminated in the events of 'black Monday' (24 August), where major global equity markets fell by between four and nine per cent.

Despite these concerns, the PBoC has been quick to reassure the world that it has the necessary tools to combat any growth concerns. It continues to decrease interest rates and the bank reserve requirement ratio to stimulate growth. China's official third-quarter GDP growth rate came in at 6.9 per cent and the Shanghai Composite has rebounded significantly from its August lows (by around 20 per cent at time of writing).

Despite some signs of stabilisation in China, its slowing growth has weighed on hard commodity markets, many of which are now at or near multi-year lows. Likewise, oil prices have fallen significantly, primarily due to oversupply issues resulting from increased production in the United States. Together with exported deflation from China, these factors have contributed to a benign global inflation situation, and this has been a major factor driving the implementation of large economic stimulus measures in Europe and Japan.

Conversely, the US is expected to tighten its monetary policy in the near future by raising interest rates, having delayed in September, primarily as a result of the developments in China and the associated heightened risk to financial stability. This is a result of the encouraging performance of the US economy, notwithstanding some recent weaker data. Although it appears the Federal Reserve is set on raising US interest rates soon, we consider it likely that the pace of subsequent interest rate rises will be slow. As such, we judge the fundamentals for equities as relatively attractive as we head into 2016. 

Claire Bennison is regional director at Brooks Macdonald in Manchester

She writes a regular in-practice article on asset management for Private Client Adviser

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