This article first appeared in Capital, The Edge Malaysia Weekly, on December 21 - 27, 2015.
THE world’s two largest economies — the US and China — sneezed this year and the global market caught a rather severe cold.
News of a slowing Chinese economy and the prospect of a US Federal Reserve interest rate hike have been dictating the direction of the world’s equity markets for most of 2015. The low crude oil and commodity prices, coupled with geopolitical tension in the Middle East and political uncertainty in some of the largest emerging market economies such as South Africa and Brazil, added to the cautious sentiment.
Concerns over the slowing Chinese economy and the country’s decision to devalue its currency sent global indices to multi-year lows in the third quarter.
China’s decelerating growth has dampened demand for commodities such as coal, iron ore and copper, which have seen declines of 12%, 42% and 28% respectively this year to almost decade-low prices.
The Shanghai Composite Index saw a volatile performance this year. It began with a 4½-month rally that saw the index gain 68% to an eight-year high of 5,166.35 points in mid-June. But when the bubble burst, the index collapsed, losing over a third of its value in less than a month.
Year to date, the index is still up by 6.18% based on Dec 11’s close of 3,516.19 points. It is likely to end the year as the fourth best-performing major index in Asia-Pacific, but the damage has been done to confidence.
Among the developed economies, the Japanese indices have been the standout performers with the Nikkei 225 gaining 10.2% and Tokyo Price Index (Topix) gaining 10.09% this year.
For perspective, the Dow Jones Industrial Average only managed a 3% gain during the same period after trading sideways for most of the year.
Prime Minister Shinzo Abe’s aggressive policies have jumpstarted the stagnating economy. While it has only begun stirring, the stock market at least continues to benefit.
Keep in mind that the yen’s depreciation against the US dollar has slowed tremendously this year, losing only 1.1% despite a particularly strong greenback.
When it comes to currency depreciation, however, none was more drastic than the 3% devaluation of the renminbi against the US dollar in the middle of the year as the Chinese stock market fell. Year to date, the renminbi has lost about 4% of its value — uncharacteristic of Beijing, which is normally against persistent depreciation.
Closer to home, the Asean markets did not have a good year. The only exception was Vietnam, which saw a mild 3.26% YTD gain in the Ho Chi Minh Stock Index. The next best-performing index in the region was the Philippine Stock Exchange index and it lost 6.85% this year.
The FBM KLCI did slightly worse, falling 6.88% in the same period to close at 1,640.14 points on Dec 11. A combination of low oil prices, political uncertainty and a slowing economy is setting up the local benchmark index for its second consecutive annual decline, the first since the 1997 Asian financial crisis.
Still, the FBM KLCI’s performance is nowhere near that of the worst-performing index this year. Ukraine’s Equities Index has lost 32.7% of its value while the Ukrainian hryvnia has slid 33.5% due to the ongoing conflict between the country and pro-Russian separatists.
Of the 91 primary indices worldwide, only 33 ended the year in positive territory — but that is in local currency terms. In US dollar terms, only 12 indices posted YTD gains as at Dec 11.
Even then, top-performing indices such as Venezuela’s, which has gained over 288% this year, do not reflect a strengthening economy. Instead, it is a symptom of the weakness and fragility that stems from the collapse of the Venezuelan bolivar and skyrocketing inflation.
The government-controlled rate of the bolivar is around 200 to the US dollar, but black market rate is estimated at over 878 to the greenback. The country’s economic collapse is due in no small measure to the fall in commodity and oil prices. Oil prices are now touching 12-year lows of less than US$37 per barrel.
In this regard, Venezuela is not alone. Other Latin American economies such as Peru and Brazil, which are heavily reliant on exports, have also been hit and the problem can be traced back to China — the largest consumer of commodities, ranging from minerals to coal and crude oil.
Argentina’s stock market is the exception — it gained 49% YTD to close at 12,779.23 points on Dec 11, lifted by optimism that followed the presidential election, which took place at end-November.
It is noteworthy that Argentina’s primary equities index, the Merval index or Mercado de Valores de Buenos Aires, has historically been one of the worst performers in the region. Argentina’s long-standing domestic problems — a weak economy due in part to a US$95 billion debt default in 2001 that is still dogging it today — are a bigger issue for the country.
But despite the nerve-wrecking fall in the third quarter this year, most indices are still trading close to multi-year highs, since the global financial crisis in 2008.
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