Equity markets made one of their worst starts to a New Year since 1900, with the MSCI World index tumbling 6% in January.
Uncertainties related to the slowdown in China’s economy cranked up financial stresses and strains on companies producing raw materials. In addition, the US dollar’s rise was an added volatility factor as it increased the cost of debt issued by emerging-market borrowers.
Falls of 5% on the S&P 500, 6.4% on the Stoxx Europe 600 and 7.4% on the Topix in January pushed valuations back down closer to their long-run averages. P/E multiples stand at 15.6x for the S&P 500, 14.2x for the Stoxx Europe 600 and 12.7x for the Topix.
However, earnings growth forecasts continue to decline, principally owing to weak energy prices. Expected earnings growth for 2016 works out at 4% for the S&P 500, 5.4% for the Stoxx Europe 600 and almost 11% for the Topix.
By end-January, pessimism had reached extreme depths, and the Bank of Japan’s decision to shift to negative interest rates acted as the catalyst for a market rebound. This rally should be extended thanks to the prospect of further monetary easing by the ECB in March.
Moreover, any postponement of rate hikes by the Fed would provide an extra factor of support as it would be likely to weaken the dollar, thereby helping to stabilise commodity and oil prices.
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