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By Sunil Kumar Singh
December 31, 2015 | 12:30 | Dubai
A year has gone by and as we ring in the new year, it’s time to look back in hindsight. The questions dogging investors as 2015 draws to a close: what went wrong and what kept investors on tenterhooks in 2015. Here are the most impactful events that defined the global financial landscape in 2015.
Year 2015 was one of the worst years for crude oil in over a decade, as a mix of over-capacity and weak demand forced crude oil prices to their lowest levels near 11-year low. On December 29, global benchmark Brent hit $35.98, its lowest since 2004. Various factors put pressure on oil prices in 2015. The US shale oil production, using hydraulic fracturing or fracking technology, contributed to a global supply glut. In addition, decision by Organization of Petroleum Exporting Countries (OPEC) to not cut oil production, the coming of new oil from Iran and scaling down of global demand added to the oversupply.
Other Commodities crash too…
In fact, the entire range of commodities had a tough 2015, with prices for everything, from crude oil to base metals and precious metals to agri commodities plummeted. The prospect of further USD strength, coupled with the ongoing supply glut in many sectors, pushed commodities prices lower by 25% in 2015. Gold too slipped 9% in 2015, its third year of losses.
High-yield bonds under pressure
While the expectation of higher U.S. interest rate added to the upward pressure on corporate bond spreads, high-yield bond markets were under pressure for most of 2015, hurt by lower oil prices, weaker corporate profits and rising geopolitical strains. The Institute of International Finance (IIF) said in a report that although spread widening was more pronounced in highly indebted sub-sectors —including the US energy sector and across emerging markets — data on primary dealers’ inventory positions suggest that lower liquidity also played an important role in the rout.
Emerging markets wilt
Emerging market real GDP growth slowed by 0.1 pp to 2.5% in November on a 3m/3m basis, in a continuing sign of an EM growth slowdown. In the first ten days of November alone, growing expectations of a December Fed liftoff contributed to withdrawals of over $5.5 billion (0.5% of AUM) from EM funds and ETFs.
A year of deals
Cross-border merger and acquisition (M&A) activity increased significantly in 2015, especially in the first half. According to UNCTAD’s Global Investment Trends Monitor, the value of cross-border M&A purchases, an indicator of outward FDI flows, rose to $441 billion, a 136% increase over the same period of 2014. Multinational enterprises (MNEs) from developed countries were the principal drivers of the global cross-border M&A trend. European MNEs, after a number of years of high divestment levels, registered a sharp rise in the value of acquisitions in 2015.
The great China crash
In August 2015, the Shanghai Composite Index (SCI) plunged by over 20%. This was the second significant market drop in less than two months, following a similar plunge in July, the lowest since February 2007. It is important to keep in mind the Shanghai stock market valuation had grown by more than 150% between June 2014 and June 2015, and expectations were fairly elevated. The Chinese summer crash wiped out hundreds of billions of dollars in market capitalisation and sent shares tumbling across Europe, Asia and the US. The Chinese authorities responded to the market collapse by announcing several measures.
Renminbi included in SDR basket
In December, IMF announced the Chinese currency renminbi (RMB) is to be included in the basket of currencies which make up the IMF’s Special Drawing Right, or SDR. This is the first time in over 15 years that the list of currencies comprising the SDR has been altered. “The Executive Board’s decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems,” said the IMF’s Managing Director, Christine Lagarde.
Fed goes for a lift-off, finally
On December 16, the US Federal Reserve increased interest rates by 0.25% to 0.25–0.50%. This was the first hike in nearly a decade, which indicates faith in the economy. The Fed also raised its projection for the country’s economic growth in 2016 to 2.4% from 2.3%. Economists had expected the central bank to hike interest rate by 0.25%.