As usual, the end of the year is the right time for investors to be embraced with warm wishes and with the best outlooks for the upcoming year. The aim of this “best wishes” practice for sell side financial institutions and for independent research houses is to provide us with a review of the main stories that characterized the last 12 months and to highlight the themes they expect to materialize in the future.
This is a very nice exercise, very similar to astrological predictions, at least with the same power of prophecy. Traditionally the purpose of our weekly article called the “Rear-view mirror” has been to describe the current situation. A clear picture of the economic and financial environment is given. Based on a carefully selected set of information the reader can formulate its own view and even try to anticipate the behaviour of some financial variable.
We are still committed to this basic principle, thus in this special edition we are going to emphasize the topics we all were most concerned about.
Over the past year, the equity market bifurcated, showing two different tales: many consumer and commodity-consuming sectors benefited from a supportive economic environment; industrials and commodity-producing ones have been affected by a slump of demand, a gut of supply and declining profits. A proof of the above status is the divergence between value and growth during 2015; in fact, after several years in which the two styles tracked each other, they started to assume a different pattern. In this sense we could argue that there is a high probability to observe the same behaviour in the coming months. Having said that, the activity of sector selection and stock picking, will be even more crucial.
The fixed income world apparently was focused on a diverging monetary policy between Europe and US. We often talked about expectations mounted on Central Banks; at this stage we can pay attention to a financial variable that summarizes what has in reality been happening during the year. If we look at the Euro-Dollar for instance, largely far from the parity (expected from many market participants), we could easily asses that the ECB was less dovish than expected combined with a less hawkishness from the FED.
Higher volatility due to unexpected spikes, a government price action affected also by the plummeting of the Oil and, consequently, by a reprising of inflation breakeven; all in all, the global fixed income return disappointed investors due to the widening of credit spreads too. Since 1995, it happened only twice, during 2001 and during 2015, that none of the traditional asset classes for an American investor (equity, long term bonds, cash and commodities) returned more than 10%.
Finding opportunities in this context is very difficult, but if I need to look for the cheapest asset class, I could say that volatility is pricing a scenario that does not take into account any risk at the moment. There is no long term result if not built on a series of short term bets. This is even more true for an European investor as interest rates are suggesting that the future is more certain than the present. Undeniably we are in front of an illogical principle, both in financial and punctual terms. Still we cannot forget the importance of flows. In fact, during last months the high yield suffered also due to strong outflows from the asset class. Disappointed investors’ expectations might further exacerbate this phenomena.
Wishing you all the best for 2016, we shall continue to monitor the evolving situation through next “Rear-view mirror”. In the hope to maintain a rigorous eye, with the objective to navigate, together, these murky waters.