Q3 2015 Market Commentary

Concerns over emerging markets intensified during the past quarter. In particular, heightened uncertainties over China’s growth prospects and its equity market slump rattled global equity markets.

Germaine Share 12.10.2015
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All market indexes, category averages, and fund performances are quoted in USD for comparison purposes unless otherwise stated.

Concerns over emerging markets intensified during the past quarter. In particular, heightened uncertainties over China’s growth prospects and its equity market slump rattled global equity markets, and the MSCI World Index slid 8.45% (in US-dollar terms) in the third quarter.

Despite rampant beliefs that the U.S. Federal Reserve would start normalizing interest rates, the Fed left rates unchanged at its September meeting, as “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” This signaled the Fed’s trepidation over the impact of slower growth overseas on the domestic economy. The strong U.S. dollar (the U.S. Dollar Index, or DXY, has gained 6.74% year-to-date) also presents another potential headwind for economic recovery. U.S. equity investors seemed to have echoed these fears, and the S&P 500 was down 6.94% (in US-dollar terms) for the quarter. Nonetheless, U.S. economic activity continued to expand moderately and its unemployment rate fell to 5.1% from 5.3% during the quarter.

The eurozone continued to grow at a slow and steady pace, and the Markit Eurozone Composite Purchasing Managers Index (PMI) registered a healthy 53.6 in September. That said, this reading was still a four-month low. This could partially be attributed to slowing growth in Germany, the largest economy of the region. Perhaps more worrisome was that inflation in the eurozone slid from an encouraging 0.2% reading in June to an estimated deflationary -0.1% reading in September. This has propelled speculation that the European Central Bank (ECB) will expand its quantitative easing program, which currently entails EUR 60 billion of bond purchases each month. The MSCI Europe Index retreated by 8.86% in the third quarter when measured in euros.

China had a tumultuous quarter as the economy continued to weaken along with its stock market nosedive. The Chinese manufacturing sector contracted further; the Caixin China General Manufacturing PMI (formerly the Markit/HSBC China Manufacturing PMI) registered at 47.2 in September, which was a six-and-a-half-year low. Billed by the Chinese government as an effort to give market forces a bigger role in determining the exchange rate but generally viewed by the market as a move to raise the competitiveness of the industrials sector, the People’s Bank of China (PBOC) cut the yuan’s central parity rate against the US dollar on three consecutive days in mid-August, resulting in an approximately 3% devaluation. After peaking in mid-June, Chinese stocks plummeted as margin financing unwound. In response, the Chinese government rolled out a series of aggressive measures during the quarter to support the stock market. This included the China Securities Regulatory Commission (CSRC) relaxing margin-trading rules, cutting equity transaction fees, and banning major shareholders (those with more than a 5% stake in a listed company) and corporate executives from selling their shares for six months. In addition, the central bank cut benchmark interest rates for the fifth time since November 2014, putting the one-year lending rate at 4.60% and one-year deposit rate at 1.75% effective 26 August. The required reserve ratio (RRR) was also reduced by 50 basis points to 18% for most large banks as another attempt to revive the economy and the stock market. Despite various rescue efforts, the CSI 300 Index plunged by 30.17% in the third quarter and erased all year-to-date gains. The Hong Kong stock market exhibited similar, though arguably less pronounced, volatility. The Hang Seng Index tumbled by 19.83% and a year-to-date loss of 8.99%.

Yields fell across major bond markets in the third quarter against the backdrop of turbulent equity markets. The U.S. 10-year Treasury yield fell from 2.35% at the end of June to 2.03% at the end of September. Similarly, the 10-year German bund yield retreated from 0.76% to 0.59%, while 10-year Japanese government bond yields dropped from 0.47% to 0.36% during the quarter. As a result, the Barclays Global Aggregate Index was up 0.82%.

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Germaine Share  Germaine Share is a Senior Manager Research Analyst with Morningstar Investment Management Asia.

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