Five key themes from 2015 that could influence 2016

There can be no denying 2015 was an eventful year, even if it left investors in mainstream stocks or bonds, or mainstream stock and bond funds, little better off at the end than they were at the start.

It began with the Swiss National Bank’s decision to break the Swiss franc’s peg to the euro (which prompted the Swiss counter to soar, cleaning out legions of forex traders and a couple of currency brokers in the process).

It then moved seamlessly through two Greek elections and Athens’ ongoing debt crisis, the UK general election, a recovery and then fresh collapse in oil prices, a mid-year plunge in the Chinese stock market, turmoil in the junk bond markets, dividend cuts galore in the FTSE 100 and the first increase in US interest rates from the Federal Reserve in nearly a decade.

But what’s done is done. The secret now for investors is to see what lessons can be taken from 2015 and applied to 2016, to help them protect wealth and seek positive returns while managing risk most effectively.

In this column’s view, the following five events and trends from last year offer the most important lessons for the coming one, even if they may not have been the very biggest news stories:

1.   Income was as important as ever but finding it wasn’t easy. Eight FTSE 100 firms cut (or talked about cutting) their dividend in 2015. Seven of those provided crunching share price falls to add to the insult of shareholder payout injury, while Morrison’s even contrived to fall out of the index altogether.

Dividend cutters added capital losses to shareholders’ woes in 2015

Source: Thomson Reuters Datastream

This goes to show there are few worse investments than an income stock that cuts its dividend, so the danger to be aware of here is over-reaching for yield in 2016.

2. Hungary, Denmark and Ireland were the year’s best-performing stock markets, to suggest it pays to look beyond the obvious and carefully study how an index is made up. Hungary’s 14-stock BUX index was the top performer in 2015, in total return, sterling terms, helped by prime minister Viktor Orban’s unorthodox tax and economic reforms. Denmark came second, not least due to the heavy weighting in the OMX-20 index of drug giant Novo Nordisk and the global enthusiasm for pharmaceutical firms.

Hungary, Denmark and Ireland led the way among 46 developed and emerging markets in 2015

Source: Thomson Reuters Datastream. Total returns, in sterling terms.

As 2016 begins America feels over-loved, emerging markets and Europe relatively under-loved, the former because they have underperformed for four years, the latter because it stands at a near-record high discount to America - though US assets do at least have the dollar on their side. 

3.  The commodity price collapse showed that deflation was more of a threat than ever. China is exporting deflation to the world and no-one can ignore events in Beijing, whether they want to or not. Mining and oil firms are adapting to the new reality of lower prices with cost and capex cuts but some dividends look safer than others, especially as the Bloomberg Commodity index stands at 16-year lows.

Commodity index has fallen back to 1999 levels

Source: Thomson Reuters Datastream

In the UK there are also still potentially too many miners in the FTSE 100 for comfort (seven at the latest count) if stock market history is any guide. Over 20 tech, media and telecoms firms flew into the FTSE 100 during the 1998-2000 bubble yet just two were left after the collapse. The demise of the commodities super cycle might end the same way if prior market patterns repeat themselves.

4. Investors had to consider foreign exchange movements, especially if they were looking overseas. Central banks were still engaged in a race to debase as they relied on currency weakness to stimulate growth. No-one wanted a strong currency, even if America and Switzerland each got stuck with one while British investors in Western European markets lost some capital gains on rising stock prices to euro weakness. 

The dollar powered higher in 2015

Source: Thomson Reuters Datastream, Bank of England

In 2016, overseas investors may fight shy of UK assets if a ‘Brexit’ referendum looks like it will result in the UK’s withdrawal from the Eurozone, while a strong dollar could again be a running theme. If the Fed keeps raising rates further dollar strength is possible and this has historically been a bad sign for emerging markets. 

5. Central bank policy divergence meant markets were more volatile. After years of soaking up the drug of cheap central bank cash, markets are having to go cold turkey, at least in some regions. The US Federal Reserve and nine other central banks raised interest rates in 2015, even while their Japanese and European equivalents played fast and loose with their Quantitative Easing programmes. 

America’s fear index, the VIX, showed signs of life in 2015

Source: Thomson Reuters Datastream

Although only the summer showed any real volatility in equities, emerging market assets, commodities and junk bonds took a hammering in 2015.  It is possible that this more extreme market action moves further in from the periphery toward more mainstream, core markets. Monetary policy divergence could lead to further market volatility in 2016 and investors may need to ensure they are sufficiently well diversified and protected.

Russ Mould

AJ Bell Investment Director