6 January 2016

The year of the monkey

The New Year got off to a tricky start for investors. Not that 2015 could be viewed as the easiest of years. The FTSE 100 Share Index closed around 5% lower than at the start of the year, despite breaking into new high ground in the spring.

And December, usually a festive month for markets, proved somewhat muted. However, the first day’s trading for 2016 did prove particularly difficult, with shares losing more than 2% in a single day.

As in the upset that saw markets reverse the bullish trends established around the world in the first few months of 2015, China is behind the unsettled conditions that have been ushered in this year. A negative confidence survey followed on from disappointing manufacturing numbers and upset sentiment, leading to a sharp fall in Chinese shares. Trading was suspended for the day as a result and even subsequent heavy government buying failed to steady the market there completely.

The ripples inevitably reached Europe, with the German stock exchange posting losses almost twice as great as those experienced in London. But then, Germany is more exposed to China economically than we are in the UK. Interestingly, the euro remained remarkably firm, while sterling has been suffering as a consequence of a weakening economic performance, suggesting an interest rate rise will be later rather than sooner.

It is a measure of how the world has changed that has global stock markets dancing to the tunes emerging from Beijing and Shanghai. Despite being significantly smaller in economic terms than the US, China nevertheless accounts for 15% of global economic output. More important, they were a significant consumer of raw materials as the nation industrialised and brought its internal infrastructure up into the 21st century.

Those days of significant spending on commodities such as oil and steel are now firmly in the past as China endeavours to establish itself as more of a consumer led economy, with a greater emphasis on service industries. The knock-on effect has been to drive commodity prices lower, which in turn has impacted on many of the so-called emerging markets, such as Brazil, now in recession.

It is too early to determine with any certainty how the year ahead might pan out for investors, but it does seem as though the focus on China will continue. Bear in mind that not all markets posted losses like ours last year. Germany and the US delivered positive returns, for example, which serves as a reminder that, unlike the Footsie, they are not so dependent on oil and mining. Perhaps the good news is that this uncertainty should lead to a softer approach from central banks. 

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