The first quarter of 2016 will go down in market history as the most pronounced V-shaped recovery ever recorded in the first quarter of a year. Fears over both the slowing global economic growth and that central banks may have run out of policy tools to stem a renewed economic slowdown caused the worst Q1 stock market sell off recorded for decades.
By February 11th developed world stock markets had lost between 10 and 20% in value and where thus hovering in the territory between severe correction (-10%) and full blown bear market (-20%).
Then the mood and momentum turned as oil and commodity prices gradually recovered ground, the US$ stopped rising the Chinese Renminbi stopped falling and the fears over a looming global recession abated.
Central banks contributed their part, by either proving that they had by no means run out of monetary policy tools (Eurozone’s ECB) or at least would act sensibly and slow their path of normalising interest rates upwards (US Fed).
With economic data showing that Global economic development is by no means falling off a cliff, the sentiment from doom and gloom changed to a renewed focus on a resilient, albeit slow economic growth scenario.
As the first quarter ended, western equity markets were firmly on course for a full recovery, while from the perspective of a weakened £-Sterling, Global stock markets as represented by the MSCI World index even recorded a slight gain.
Best performers of the quarter were commodities, although that was more as a counter-reaction to their haemorrhaging declines previously, rather than a fundamental change in direction.
The biggest return surprise perhaps was the strong performance of the government bonds. Their overvalued prices were first pushed up by investors seeking their relative safety after stock markets began to crumble and then when equities began to recover they didn’t fall back as a consequence of the continued monetary easing support of central banks.
We felt that the January and February market correction was unjustified from the perspective of a fairly resilient global economy, but that the correction came not entirely unexpected, as such market upheavals have historically often accompanied the change towards monetary policy tightening as initiated in late December by the US Feds first interest rise in a decade.
Much of the market unease was around fears that rapid changes in currency values between the US$ and the Chinese Renminbi (RMB) during 2016 could seriously disrupt flows of capital. Therefore, the most reassuring observation of the outcomes of the first quarter of 2016 is not that equities have broadly recovered, but that the US$ has stopped and reversed its 3 year uptrend and that equally the Chinese Renminbi is no longer depreciating. This has the potential to put some of the more serious market concerns to rest and should lead to a positive Q2.
However, the general market nervousness has not gone away and for all those who believe that the V-shaped market recovery was merely a reaction to the stabilising oil and commodity prices, a renewed sell-off is possible if commodity prices decline again. This could happen as there remains a commodity supply surplus over demand.
In the meantime our focus will be on the movement in Sterling against other currencies and government gilt markets, whose valuations are now once again at odds with an improved economic outlook. We are concerned that in the run up to the European Referendum, the economic uncertainty of a leave vote will cause UK and European markets to become very sensitive.