The year starts cloudy for the markets - January 24, 2016

The year starts cloudy for the markets

International stock exchanges started the year cloudy, with a pressure from the sell-side. The most important US and European indices fell 10%, while their Chinese counterpart did a 20% flop. The price of crude still continues to lose its value: it fell another 25% lately. This has an effect on the developing countries and their currencies as well: South African Rand and Russian Rouble fell 7-8% and other currencies have weakened compared to USD, too. But this is still quite understandable on a global market that has been rising for six consecutive years.

Basically, the fears of investors are gathered around the followings: the slowdown of Chinese economy; the endless fall of Shanghai Composite Index and the answers the state gives to them; the constant falling of commodities and the consequences it has on the developing, mostly export oriented countries.

Investors are also concerned about the rate hiking cycles of the Fed. At this time, we cannot be sure if there will be a real cycle: market expects of 3-4 Fed hikes in 2016, but if the risks and problems are escalating in the global economy, the Fed may stay in standby mode after the first rate hike in last December.

All this leads us to the conclusion that the global economy (even developed countries) will not have a perfect year. We are not expecting recession in the US and in the EU, but on the corporate level, there is a chance of profit recession, and that can have an effect on the performance of the stock markets.

This can result in worried stock markets, but it is also true that in a negative atmosphere like this, there is a great chance of unexpected rises as well. In the meanwhile, commodity-based economies are hurt more and more by the weakness of the segment. In countries like that we can expect even more measures of precaution and austerity. (In Azerbaijan for example the foreign exchange reserves decreased by two-thirds, the unemployment is rising, and inflation is a serious problem. Therefore, the government almost absolutely forbid the withdrawal of capital from the country.) There is even a chance of bankruptcy of bigger participants of the market, but this might be the thing that brings change to the markets. We believe that 2016 can also bring a great turnaround in the price of crude oil, and that we are in the last part of this falling cycle.

Last but not least, all this hedge-hopping of the markets and in the prices of commodities, and the constant rise of the USD could be stopped if the Fed or China would decide to launch a serious economic stimulus. This would also help the markets to settle down a bit, but even if that doesn’t happen, true gems can be found on markets.

Disclaimer: In market situations like this, it is important to have a highly diversified, stress-proof investment portfolio. It is also important to avoid emotion-based decisions and to stick to the formerly created investment strategy, since a well crafted, long term portfolio can compensate even weaker periods in time. Innovative Securities’ Profit Max is a professionally constructed, always stress-tested product.