Get a quick round-up of global equity markets in this concise monthly market wrap.
Global
World stock markets remained volatile in February 2016. After the choppy opening to mark the New Year, markets witnessed an uptick in February, climbing on the back of rising crude oil prices.
The outlook for oil prices brightened as major producers scheduled a meeting in March to discuss production issues. Even though stock prices have tracked oil prices in the recent past, analysts forecast that the two will diverge in the near future. The sharp turn was more of "an emotional move, people thinking they're going to miss the boat," said Michael Matousek, head trader at U.S. Global Investors Inc in San Antonio, about the gains in oil. "People are trying to stay one step ahead, thinking they know what the decision of OPEC will be."(Reuters, US Edition Feb 25, 2016)
Despite the crashes in August 2015 and the sell off earlier in the year, which can be viewed as technical corrections, the fact remains that stock prices have made solid gains. However, according to some analysts, market gains are underpinned not by strongly performing companies but by easy liquidity and financial engineering. These analysts say that the conditions are ripe for a new crisis on the lines of 2008/2009. They point to the overvaluation of financial assets, substantial leverage, continuing low growth and falling prices. Many firms have taken big risks, encouraged by the accommodative stance of central banks, in the form of zero or even negative interest rates and quantitative easing.
Further, corporate earnings have been buttressed by cost cutting measures rather than by increasing the top line. Even this scenario seems to be playing itself out, given stagnant corporate earnings in the last two quarters. Lack of sales growth combined with declining revenues put current valuations at very high price to earnings ratios, creating space for further corrections. (Market watch Feb 25, 2016)
USA
Valuation Check: Current S&P 500 PE Ratio: 21.99 (4-Mar-2016)
Mean: 15.58
Median: 14.62
Min: 5.31 (Dec 1917)
Max: 123.73 (May 2009)
Crude oil prices buttressed US market valuations, as in other markets. The other factor was the better than forecast GDP growth figures. According to the Commerce Department, the consumption expenditure price index, or PCE increased 1.3% in January, the biggest increase since October 2014. This has set off fears of another Federal Reserve rate hike. This sentiment helped to push down stock prices at the end of February.
Europe
Markets in Europe ended in positive territory in February, shrugging off negative data trends from around the globe, particularly the more than expected decline in Chinese manufacturing. In the Eurozone itself, manufacturing was down while employment went up.
Among the main reasons for the gains were expectations among investors that Chinese authorities would step in with a new program for stimulating the economy. Investors also expressed confidence that the European Central Bank would announce new quantitative easing measures at its upcoming monetary policy meeting in March.
UK
Following the stabilization in the prices of oil and metals, shares on the London FTSE traded higher. Markets reacted favorably to the Chinese Central Bank chief's assurance on managing the Yuan and growth prospects. Expectations of collective action by the G 20 countries too buoyed markets.
Switzerland
Swiss markets ended February on a positive note, with cyclical and financial stocks posting gains. Stocks of banks in particular recovered handsomely, braving doubts on their health owing to exposure to energy sector companies.
Asia
India
Valuation check: Current Nifty 50 PE: 20.24 (4-Mar-2016)
Nifty PE Highs & Lows
High: Jan 7, 2008: 26.36
Low: Oct 27, 2008: 11.51
High: Oct 11, 2010: 25.52
Low: Aug 26, 2013: 15.53
High: Mar 2, 2015: 23.94
Markets in India followed global cues in February. Earlier in the month, markets had tested historical lows. However, after the government announced that it would stick to its fiscal consolidation path, stock prices recovered swiftly. Investors were hopeful that the Reserve Bank of India would cut rates in the near future. Markets were also happy about the lack of surprises in the taxation proposals. There was renewed hope that the political parties would evolve a consensus on key reforms like the Goods and Services Tax (GST).
China
The woes of the Chinese markets have had a destabilizing effect on world markets. Now it has struck closer home. The Securities Regulator (CSRC)'s Head, Xiao Gang, was replaced with Liu Shiyu, of Agricultural Bank of China Ltd.(AgBank). Liu Shiyu is a former deputy governor of the Chinese central bank and is a trained economist. He is expected to bring in new measures to stabilize markets.
To reduce losses and control volatility Xiao had introduced the concept of 'circuit breaker', which backfired and had to be hastily withdrawn in four days.
Nanjing-based hedge fund Huyang Investment's fund manager, Zhang Kaihua opined, "Xiao's departure is not a surprise following the recent stock disaster. This is a role vulnerable to public criticism because most Chinese retail investors are destined to lose money in such a market". (Investing.com Mar 01, 2016)
Andrew Sullivan, managing director, Sales trading at Haitong International Securities Group in Hong Kong said, "But by bringing in the AgBank chairman, they are really not bringing anybody with a fresh market perspective but a political insider". (Investing.com Mar 01, 2016)
Japan
Japanese markets rose at the end of February, in step with gains in the American markets. While a weakening yen strengthened exports, oil price increases too buoyed investor sentiments. Stocks of export oriented companies made gains, while companies with weak balance sheets lost value.
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