OpinionDec 29 2015

2015 was year US was no longer in driving seat

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It was events and policy changes in the Eurozone and China that drove markets in 2015 rather than events in the US – some events generating Euro-phoria, but most creating doom and gloom.

In what could have been the biggest shock to the post-World War II political system, Greece came close to exiting the Euro, an event that had the potential to take Spain and other countries out of the Union with it.

While the Greek government and population eventually submitted to the demands of Eurozone finance ministers, and legislated painful reform, the lack of any delivery means that a Greek tragedy may yet come back to worry financial markets.

In the face of falling inflation and poor economic performance, the European Central Bank managed to win over its opponents and start its bond-buying program (QE) in March.

Although this was much-anticipated and appreciated by investors, the policymakers on the borders of the Eurozone had to deal with the negative consequences of quantative easing.

Sweden, Denmark and Switzerland all cut official rates below zero, opening the latest front in the war against near-zero inflation.

But away from Europe, China was the epicentre of events in 2015.

Most notably, Chinese policymakers embraced the ‘new normal’ – a shift away from growth at all costs and mega-infrastructure projects, towards rooting out corruption, growth from services and consumer spending, and countering pollution.

All in all, we face the prospect of a much lower future growth rate in the world’s second largest economy.

This has had a powerful impact on commodity markets.

Notably, iron ore prices almost halved to reach levels not seen since 2004.

While China’s demand for energy has actually increased, the oil market has undergone a seismic change.

Opec has relinquished its role as the cartel in world oil markets, maintaining high production despite falling prices.

Rising output from non-Opec member such as Russia and the US has destroyed the power of the cartel: it is now a ‘price-taker’, not a ‘price-setter’.

Rising output from non-Opec member such as Russia and the US has destroyed the power of the cartel: it is now a ‘price-taker’, not a ‘price-setter’.

Saudi Arabia had to keep oil flowing to fund its expensive war in Yemen, rather than cut output to eradicate the glut in world markets.

As a result the Brent oil price has fallen by a third this year, with longer-term forward prices crashing below 2008 lows.

A $20 oil price is a real possibility next year, representing a significant risk for asset markets in 2016 as commodity companies enter a default cycle, but nevertheless super-low energy costs will act as a large effective ‘tax-cut’ for global growth.

Finally, the rout in commodity markets, a strong dollar and poor macro-economic policies meant that emerging market equities have under-performed developed markets for the fifth year in a row.

Despite several years of hope that emerging markets were about to turn around, this year emerging market investors finally capitulated and sold en masse.

Developing market funds have now lost half the massive inflow that came in during the boom years of 2004 to 2013, a sign that the dramatic underperformance in emerging markets may be entering its final stages.

Shaun Port is chief investment officer of Nutmeg