Trends: 2015 — annus horribilis

The year 2016 has begun on a torrid note with the crash in Chinese stocks and turmoil in bond and currency markets. This opening is far from comforting to investors who were hoping for some stability after the tempestuous time their portfolios went through in 2015, when almost all asset classes plunged.

It was not just the wealth of individuals that contracted last year due to falling asset prices; the macro picture too was equally disappointing. The sharp slide in crude oil prices — that began the year at $53 but fell below $35 towards the end — has managed to render all countries that were building their wealth with ‘petro-dollars’ much poorer.

The slide in other commodities, including aluminium, zinc, lead and copper, severely dented the coffers of countries, such as South Africa, Russia, Australia and Indonesia that were dependent on the income earned by exporting these commodities.

Slowdown in China, as the country re-balances its growth, has been the other factor that is causing severe imbalances in global trade and, consequently, global growth as well. The slower global growth, at 3.1 per cent in 2015 (down from 3.4 per cent growth in 2014), has affected the wealth creation potential of many emerging economies.

The shrinking wealth of nations is partly captured in the foreign exchange reserves of countries. Accretion to the foreign exchange reserves of all countries (excluding gold) is down from $11.76 trillion towards the beginning of 2015 to around $11.25 trillion by the end of that year. Reserves held by China are down from above $3.8 trillion to around $3.4 trillion by November 2015.

Given this gloomy picture, we looked at the performance of some of the indices tracking the asset classes that attract high net worth individuals. Here’s what we found.

Stocks form a part of most individual portfolios. And equity as an asset class did not do too well in 2015. The MSCI world index is down 1 per cent since the beginning of January, indicating that most stock portfolios would have disappointed. There might have been opportunities for those wishing to take risk in frontier markets, such as Venezuela or Jamaica, that delivered 278 per cent and 87 per cent returns, respectively.

But investors who bet on equity in Ukraine or Brazil would have seen their wealth erode substantially. The benchmarks of these countries are down more than 40 per cent in dollar terms.

Investors who bet on Chinese equity towards the beginning of 2015 are quite likely to be staring at a huge loss now. The mad frenzy for stocks in Mainland China took stock prices to the bubble territory with the Shanghai Composite Index racing from 3,234 in January 2015 to 5,176 by June.

Investors, however, turned nervous at higher levels and began taking money out, correcting prices in the process. The Shanghai Composite had wiped out all the gains by September.

Emerging markets, especially those dependent on commodities, are unlikely to see any respite in 2016. The foreign fund outflows from emerging markets could continue, applying downward pressure on stocks.

Those with higher risk appetite can however, scour the frontier markets that have been outperforming over the last six months.

With the outlook for global growth in the doldrums, one would have thought that investors would have preferred parking some money in precious metals. But that did not play out. Gold, emerging from a flat 2014, delivered some gains in January 2015, as geo-political tensions mounted.

But it was a downhill ride thereafter, with prices of the yellow metal falling from $1,299 to end the year close to $1,040. Silver, gold’s poor cousin, fared equally badly, losing 10 per cent in 2015. If gold and silver were in a gradual glide-path, the downward ride for platinum was scary. This precious metal hit a high of $1,290 in January 2015, after which it plunged headlong into a deep correction. It is currently 33 per cent below the yearly peak.

The metal that is used for making catalytic convertors for diesel vehicles was hard-hit by the Volkswagen emission scandal. Palladium, the other precious metal, was also equally hurt by the slowdown in China as the country accounts for around 22 per cent of the demand for the metal.

Compared to gold, silver could be a better bet in 2016 as the cost of production is currently much above the market price. Further drop in price can make silver mines shut down, reducing supply.

Investors in wine are typically not the kind who will lose sleep over the under-performance of their investments for a year. And wines as an asset class do not seem to have done too badly. The Liv-ex 100 wine index — that tracks Bordeaux red wines from 24 leading Chateaux — was flat in 2015.

But if you had been lucky enough to have purchased Angelus 2005 or Pegau, Chateauneuf Du Pape Reservee 2010 towards the end of 2014, you would have made more than 37 per cent returns by the end of November 2015. Returns from investments in Real Estate Investment Trusts (REIT) that invest in rent yielding investments have also been rather sedate. S&P REIT global index — the benchmark for publicly-traded REITs listed in both developed and emerging markets — was down 2 per cent over 2015.

Capital appreciation from these investments therefore has been negligible, but investors would have earned income from the rent received by these investments.

The Barclay Hedge Fund Index, which is a measure of the average return of hedge funds tracked by Barclays, returned 0.92 per cent between January and November 2015 showing that hedge funds too found it difficult to keep their heads above the water.

These returns were lower than the 11.12 per cent returns earned in 2013 and 2.88 per cent in 2014. Many hedge funds investing mainly in commodity or distressed assets are said to be in severe trouble and shutting down currently.

With the problems currently plaguing the world — slowdown in China, commodity prices rout et al — likely to persist at least in the first half of 2016, asset prices could stay volatile. Besides, rate hikes in the US will cause unwinding of assets across the world as money borrowed through the dollar carry trade is re-paid. ‘Interesting’ times ahead.