UBS: Investors overlook fundamentals as sentiment plummets
The market turmoil of January, much of which was characterized by asset prices being determined by non-fundamental factors and risk assets selling off in concert, serves to emphasize the importance of holding a range of diversifying trades in portfolios.10.02.2016 | 10:28 Uhr
- Most risk assets had a very bad start to the year, as concerns about China’s economic transition, slowing global growth and a rapidly deteriorating oil price weighed on returns. The Chinese economy grew at the slowest pace since 2009 in the fourth quarter of 2015—with GDP expanding by 6.9% on the previous year—while the adverse effects of oil and other commodity price weakness continued to be felt across the emerging economies, as well as financial market segments such as US high yield. The price of a barrel of WTI crude oil fell to just under USD 27, its lowest level in over 13 years.
- The latter half of January saw a sharp reversal in sentiment, however, with European Central Bank (ECB) president Mario Draghi appearing to deliver an aptly timed promise of an enhancement to the ECB’s quantitative easing program in March. With investors taken by surprise, having anticipated that Draghi would once again fail to meet their expectations of further stimulus as was the case in December, risk assets rallied strongly. Eurozone equities made some of the biggest two-day gains of recent years. To wrap up an unusually eventful month, the Bank of Japan became the first non-European central bank to introduce a negative interest rate policy, sending the Japanese yen sharply lower against the other major currencies.
- Equity markets sold off across the board in January, with the MSCI EAFE Index (developed excluding US equities) finishing the month around 7.8% lower, while the MSCI Emerging Markets Index was down 6.2%. Investors sought refuge in the perceived safety of government bonds, with the yield on the 10-year German Bund down 37 basis points (bps) on the month, and yields on US Treasuries (-34 bps) and UK Gilts(-39 bps) falling equally sharply. High yield corporate bonds sold off amid the deteriorating risk appetite.