Developments in China, disappointing US economic data, the introduction of negative interest rates in Japan, and falling oil prices made for a volatile mix in January 2016.
Developed markets started 2016 a bit softer than expected on the back of uncertainty concerning China and some disappointing US data. Early in the month, the focus was on developments in China, where data showed a continued weakening in the economy. Two policy moves by Chinese authorities during the month only added to the market’s uncertainty.
Economic data from the United States was generally disappointing, further weighing on investors’ minds, as the US economy felt the effects of a rising US dollar, higher debt costs and softer external conditions.
Oil prices also continued to fall as supply exceeded demand, and this imbalance likely to get worse before it gets better. Interestingly, lower oil prices continue to weigh on share markets despite most companies, individuals and economies being net oil users or importers, which intuitively suggests that they should benefit as oil prices fall. Clearly, this doesn’t appear to be the case in the short term but we still expect it to hold in the medium to long term.
Finally, on the last day of January, the Bank of Japan (BoJ) shocked markets by announcing the introduction of negative interest rates, a policy not as radical as the headlines suggest, though likely to inspire further sensational headlines in the coming months because further cuts to interest rates are likely on their way.
While the outlook indicates heightened risk, Mercer’s assessment at this stage is that the extent of market weakness has gone further than justified by the underlying economic fundamentals. As with any market developments (positive or negative), we have been monitoring the situation closely, and will modify the portfolios we manage if and when necessary.
However, no changes to asset allocation or manager selection were made in January, given that a new risk management overlay was introduced in December, and is having a positive impact in the weaker market environment. Some adjustments to portfolio positioning have also been implemented in early February, but more on that in our next update. While we appreciate that it’s never fun and often unnerving watching the value of investments diminish, remember that markets will experience rough patches of volatility. That is part and parcel of seeking longer-term investment growth.
Market returns were weak in January, probably more than what is justified by fundamentals as fear took hold. Here’s a summary.