Global equity markets tumbled in January and then recovered in the second and third months of the first quarter of 2016. The year began with increased concern about the slowdown in the world’s second largest economy, China, which had been the locomotive for growth in the Asian region in particular. China’s weakening was a major cause of sluggishness in global trade, which advanced only 2% last year. Fears increased that the Chinese would seek to depreciate their currency (the Chinese yuan) significantly, which would likely be followed by similar moves in other countries.
Also, a sharp fall in oil prices hit the prospects for oil-exporting economies and energy-industry companies and the banks financing them. Other commodity prices also swooned. Forecasts for global economic growth were cut back following weak performance in the fourth quarter of 2015. Some pundits (not Cumberland) began to forecast an end to the economic recovery in the United States, following the Federal Reserve’s small hike in interest rates in mid-December.
The turnaround in February and March reflected a number of positive developments, and recognition that the market had probably gone too far pricing in the valid concerns of investors in January. Consumer confidence is holding up in the US and the Eurozone. Economic data in China stabilized following increased monetary and fiscal stimulus, as has the currency. In March the European Central Bank announced further stimulus measures that focus on improving commercial loan growth and alleviating concerns about bank profitability. The latest economic data for Europe indicate that the modest recovery there continues. Also in March, the Federal Reserve cut back its forecast for further interest rate increases in 2016, which was an additional positive signal for markets. In Japan, weakness in consumer demand persists, increasing pressure on the Bank of Japan and the government to take further policy measures.
The recovery in global equities in February and March brought the benchmark iShares MSCI All Country World Minimum Volatility (NYSE:ACWV) ETF back most of the way to its end of 2015 level, retracing January’s steep decline. Advanced-economy markets lagged emerging markets in the recovery. As of March 23, the iShares MSCI EAFE (NYSE:EFA) ETF, which covers all advanced-economy markets outside of North America, was still down 3.39% year-to-date. The iShares MSCI Eurozone (NYSE:EZU) ETF, which covers the Eurozone, is down 2.48% YTD; and the iShares MSCI Japan (NYSE:EWJ) ETF is down 5.78%. The Australian market is an exception among advanced markets, with the iShares MSCI Australia (NYSE:EWA) ETF up 1.64% YTD. The emerging-market recovery actually began about January 22, well before the February 11–12 bottom in advanced markets. The iShares MSCI Emerging Markets (NYSE:EEM) ETF is up 3.88% YTD as of March 23. Latin American markets, which had been beaten down heavily, are now outperforming, helped by a recovery in commodity markets. The iShares MSCI Chile (NYSE:ECH) ETF is up 12.22% and the iShares MSCI All Peru (NYSE:EPU) ETF is up a remarkable 27.6%.
We increased cash in Cumberland Advisors’ International and Global Portfolios to protect capital. At this point, late in the quarter, we are identifying opportunities to invest where both macro and technical conditions are positive, as markets recover and risk sentiment improves.