BMO Monthly Market Commentary
BMO Global Asset Management
Commentary: End December 2015
The Irish equity market, as measured by the ISEQ (-0.65% in euro terms) took a bit of a breather in December after recording impressive returns a month earlier. The 2.6% setback, however, was still better than the MSCI-Europe Index’s 5.3% loss. The Irish index was also an investor favourite in 2015, posting a 30.2% gain on the year against 8.8% for the European benchmark as a whole. Whilst the Index followed the general downward trend of the global market in December, the gains in 2015 stem from the Index continuing to benefit from the improving Irish macro-economic backdrop during much of the year.
Amongst some of the holdings that contributed positively to the market’s gains in December were Ryanair Holdings and agribusiness group Origin Enterprises. The former along with market heavyweight CRH, Paddy Power and Irish Continental Group were also strong contributors to the year’s positive performance. Construction materials manufacturer CRH continues to benefit from improving growth in the Unites States, signs of economic recovery in Europe and a strong pipeline of development opportunities such as a new American multi-year highway bill.
Global packaging and containerboard manufacturer Smurfit Kappa and retail bank Permanent TSB Group Holdings were the main detractors to benchmark performance over the month. Permanent TSB completed a new capital raise and secured European Commission approval for its restructuring plan. The favourable Irish economic environment should also provide for a return of sustainable profit in the coming years.
The FTSE All-Share Index fell by 6.0% in euro terms in December. The electricity and healthcare equipment & services sectors were the top performing over the month whilst mining and oil & gas stocks were, again, amongst the weakest. At one point during the month the price of Brent crude oil dropped to an 11-year low, and the sector was also hit as shares in Anglo American fell by more than 10% on the announcement by the company that it planned to cut its workforce by almost two-thirds and also sell large parts of its business.
The FTSE World Europe ex-UK Index returned -4.6% in euro terms in December. At the start of the month the European Central Bank announced it would extend the end date of its bond purchasing programme and cut the deposit rate to -0.3%. Although these measures represent further easing of monetary policy, it was not as aggressive as the market was anticipating and European stocks sold off sharply. Spanish equities fell by 8.4% and the market was one of the worst performing of the region. During December Spain held general elections and whilst the incumbent party gained the largest share of votes they will not be able to form a majority government. This uncertainty caused Spanish equities to lose ground. Portugal and Greece were the top performing equity markets of the region, with gains of 3.0% and 0.5% respectively.
The FTSE World North America Index fell by 4.7% in euro terms in December. Six out of the top ten industry sectors fell over the month with energy being the worst performing sector. December saw the US Federal Reserve raise interest rates for the first time in nearly a decade. With the economy performing well and expected to continue to do so, the Federal Open Market Committee judged that a modest increase in the federal funds rate was appropriate. Oil prices continued to fall and with the typical light trading volume at the end of the year, stock market shifts were largely correlated to moves in oil and other commodities. The strong dollar persisted and weighed on demand for commodities.
The FTSE All-World Emerging Index fell by 4.8% in euro terms in December. Brazilian stocks rose at the start of the month on the news of the start of the impeachment process against the President Dilma Rousseff. However, the market fell through much of the rest of the month, with the final return being a loss of 7.8%. Data showed that third quarter Brazilian GDP was 4.5% lower than the same period in 2014. China’s stock market fell by 3.4% over December, buoyed by hopes for more focused stimulus measures. However, this failed to pull emerging market stocks as a whole above developed markets for the month.
The FTSE Japan Index returned -2.5% in euro terms in December. Japanese equities finished 2015 as one of the top performing equity markets globally. Although the Bank of Japan announced an extension of the maturity of the government bonds it will purchase, the central bank refrained from adding new stimulus measures to its current package. This went against market expectations and Japanese stocks consequently fell after the announcement. There was positive news in the month as third quarter gross domestic product (GDP) was revised upwards, moving from contraction to expansion, which meant the country had not moved into a technical recession.
Asia Pacific ex Japan
The FTSE World Asia Pacific ex Japan Index fell by 2.2% in euro terms in December. New Zealand and index-heavyweight Australia were the best performing equity markets in the region with gains of 3.9% and 0.2% respectively. Shares in dairy firm The a2 Milk Company, which is dual-listed in both countries, were at one point up by more than 30% after the company raised its full-year earnings forecast due to increased demand for infant formula from China and Australia. Thailand was the worst performing market in the index recording a fall of 10.5%.
The US Federal Reserve raised base rates by a quarter of a percent to 0.5% at their December meeting which was largely anticipated. As a result government bond yields remained fairly stable post the announcement. European government bond markets were hit at the start of the month as the measures to further ease monetary policy announced by the European Central Bank were not as aggressive as the market had anticipated.