Volatile UK market likely to continue into coming year
To understand the worst start to the year across global markets in decades it is worth taking stock of the year just past. On the face of it the falls in the first week of 2016 were caused by China ineptly trying to control its unruly stock market, with little success.
So called 'circuit breakers', aimed at halting sharp stock market drops, seemed to actually cause two such falls until the policy was abandoned on the fourth day after it was introduced. In reality, global markets sagged because of wider concerns dating back to 2015, when an already cooling Chinese economy had been trying to devalue its currency.
There were concerns around its slumping manufacturing sector, driving down demand for raw materials and in turn creating a price collapse across many types of commodities. Other negative factors remain from 2015, notably global terrorism, the spreading conflict in the Middle East and tensions caused by the subsequent refugee crisis in Europe, have continued to weigh on markets.
Last year was not particularly bad for global investors. In fact, Japan's Nikkei 225 index finished up 11% and the main US and European equity indices finished the year close to where they had begun. The US commenced the gradual process to normalise its interest rates with the first rate rise in almost 10 years, announced in December, raising them from 0.25% to 0.5%.
Emerging markets found themselves facing the prospect of higher US interest rates and a decline in demand from China. Exporting commodity producers struggled throughout 2015. Indeed, emerging markets have underperformed developed markets by around 14% in dollar terms, year to date and for a fifth consecutive year.
From the peak in October 2010, emerging markets have now declined by nearly 50%. Falling commodity prices will continue to be a major problem for these economies and Brazil will be a particular area of concern.
Despite the FTSE 100 passing the 7000 mark in the early part of last year, it ended the year in negative territory. The FTSE is skewed heavily towards suffering oil and commodity companies and as a result fell by almost 5% over the year. In such times, it is important for investors to remember the importance of dividends, as these provide a cushion during such periods of market volatility.
The UK economy itself continues to outperform most other major developed economies, although the reliance on the housing market and debt remains a concern, as does the record trade deficit. Disappointingly, the Office of National Statistics has revised the annual rate of GDP growth downward from 2.3 to 2.1%. By comparison however, the UK still has the joint fastest growth rate in the G7 industrialised nations. The continued fall in oil prices and increases in wages mean growth continues to be pushed by household spending, which is rising at 3%. Momentum may be slowing, but UK economic growth is expected to continue in 2016. The debate on when and by how much interest rates will increase in the UK will persist in coming months.
Volatility in the UK market is likely to continue well into 2016, as the prospect of a referendum on membership of the EU looms closer. Investors should remember, however, that volatility often creates investment opportunities.