Global equity returns were essentially flat as worries about slowing economic growth and falling oil prices sent markets plummeting in January and early February. Losses were tempered by a mid-quarter rally driven by improving U.S. economic data and new stimulus measures in China. Emerging markets regained some ground amid rebounding commodity prices. Bonds rose and the U.S. dollar declined against the euro, the yen and most other currencies.
Index Returns (Quarter)
U.S. stocks rebounded in March after three consecutive months of losses, pulling returns into the black for the quarter. The Standard & Poor’s 500 Composite Index rose 1% and the Dow Jones Industrial Averageadvanced 2%. The Nasdaq composite Index fell 2%, weighed down by losses in financials and smaller technology stocks.
Eight of 10 S&P 500 sectors posted gains, led by defensively oriented shares. Telecommunication services and utilities rose 17% and 16%, respectively, benefiting from a flight-to-safety trend. Energy and materials shares gained 4%, helped by a turnaround in commodity prices. After plunging to below $30 per barrel in early February, U.S. crude oil advanced steadily to end March above $38 on speculation that Saudi Arabia might begin curbing production. Gold rose 16% to more than $1,230 an ounce. Shares of miners Freeport McMoRan and Newmont climbed 53% and 48%, respectively, reversing months of losses.
On the other hand, health care and financials both declined more than 5%. Concerns about possible restrictions on drug pricing hurt biotechnology and drug companies such as Endo International, whose 54% decline was the worst in the index. Vertex, Regeneron and Alexion all saw their share prices lose more than a quarter of their value. Endo also came under scrutiny for its acquisition-oriented business model.
Worries about an expected surge in high-yield bond defaults pressured bank stocks, as did big declines in investment banking and trading. Bank of America shares shed 19% even though the company beat consensus earnings estimates in early January. Both Bank of America and Citigroup revised significantly downward their estimates for first-quarter revenues. Elsewhere in the sector, real estate investment trusts were a bright spot, adding 5% overall.
Mergers and acquisitions trailed off in the wake of 2015’s banner year. Nonetheless, global M&A activity was valued at $682 billion – better than the historical average for the first quarter, according to calculations by Thomson Reuters. Among the larger deals, home products maker Johnson Controls and rival Tyco agreed to merge in a transaction valued at about $14 billion, and Baxter International’s biopharmaceutical spinoff Baxalta agreed to be acquired by Shire for around $32 billion. Both Johnson Controls and Baxalta expect to achieve significant savings by relocating their headquarters to low-tax Ireland. TransCanada, the company behind the failed Keystone XL project, acquired Texas-based Columbia Pipeline for $13 billion in cash and assumed debt. The deal would give TransCanada access to Columbia’s 15,000 miles of natural gas pipelines.
Economic data was largely positive, allaying fears the U.S. might stumble into recession. Gross domestic product growth for the fourth quarter of 2015 was revised up to 1.4%, while GDP growth for the full year was 2.4% — the same as in 2014. The Institute for Supply Management’s purchasing managers index returned to expansion in March (reported April 1) after five consecutive months of contraction. U.S. employers added more than 600,000 new jobs during the quarter. However, the unemployment rate ticked up slightly to 5.0% in March and wage growth was anemic. The S&P/Case-Shiller U.S. National Home Price Index recorded a year-over-year rise of 5.4% in January – more than twice the rate of inflation – with low inventories suggesting home prices had further to run. But minutes from the January meeting of the Federal Open Market Committee revealed several members were pessimistic about additional interest rate hikes in 2016, while Federal Reserve Chair Janet Yellen suggested negative interest rates might be employed in an economic downturn in her Congressional testimony in February.
In bond markets, the Barclays U.S. Aggregate Index rose 3.0%. The yield on the benchmark 10-year Treasury note fell 49 basis points to 1.78%. After widening earlier in the quarter, investment-grade corporate spreads to Treasuries ended 2 basis points tighter at 163 basis points. A more dovish tone from the Federal Reserve helped to support bond prices, including the decision not to increase interest rates again after its initial December hike. That, paired with higher consumer price inflation, lifted Treasury Inflation-Protected Securities, which gained 4.5%. Corporate bonds rose 4.0%, and municipal bonds notched a 1.7% return. High-yield corporate bonds gained 3.4%.
Although some high-yield issuers had trouble selling bonds earlier in the year, stronger companies launched new offerings with relative ease. Among the notable deals, Berkshire Hathaway sold $9 billion of bonds in March, spread across seven tranches with maturities ranging from two to 10 years. The deal included $2.5 billion of 10-year notes with a coupon of 3.125% and $2 billion of seven-year bonds at 2.75%. It was Berkshire’s largest bond sale on record and enabled the company to repay most of a $10 billion loan used to finance the acquisition of Precision Castparts, which closed in January.
European stocks declined amid weak economic growth, deflationary pressures and ongoing turmoil in the banking sector. Reacting to the deteriorating outlook, the European Central Bank cut interest rates and ramped up its bond-buying program in an attempt to spur economic growth in the 19-member eurozone. Concerns about a tepid global economy and China’s slowing growth also weighed on investor sentiment. Overall, the MSCI Europe Index lost 5%.
ECB President Mario Draghi announced a series of policy actions on March 11 that included reductions in three of the central bank’s key lending rates, some of which were already in negative territory. The ECB’s deposit rate, for example, was reduced to –0.4% from –0.3%. The bank also increased its bond-buying program to €80 billion a month, from €60 billion previously, and pledged to buy corporate bonds in addition to sovereign debt. Draghi said rates are not likely to be reduced any further due to the severe impact on the banking sector.
Financial stocks fell sharply, losing 14%. Already under pressure following years of ultra-low interest rates, bank stocks were hit particularly hard by the ECB’s move. Shares of Barclays, HSBC, UBS and a slew of other banks suffered double-digit declines. HSBC shares also fell after the bank said it was under investigation by the U.S. Securities and Exchange Commission, along with other banks. The investigation reportedly focuses on the hiring of associates and family members of high-ranking government officials in Asia as part of a plan to win government business.
Health care stocks declined, sliding 10% amid rising political tensions over drug pricing and growing investor concerns about high valuations in the sector. In March, several U.S. Congress members called for another round of hearings on drug prices, increasing pressure on a biotech sector that was already hurt by a major selloff earlier in the quarter. U.S. presidential candidate Hillary Clinton also stepped up her criticism of the industry. Shares of drug giants Bayer, Novartis and Roche experienced double-digit losses.
Consumer discretionary stocks declined 5%, hurt by Europe’s deteriorating economic outlook and concerns that businesses cannot raise prices in a deflationary environment. Consumer prices in the eurozone fell –0.1% on a year-over-year basis in March, following a –0.2% decline in February. In addition, a 5% jump in the euro versus the U.S. dollar dampened the outlook for export-oriented companies. Shares of automakers Daimler, Volkswagen and BMW fell 13%, 16% and 17%, respectively.
Energy and materials stocks advanced, gaining 5% and 2% amid a modest rebound in commodity prices. Shares of Royal Dutch Shell rallied on higher oil prices and production cuts in some key oil-producing regions. In the materials sector, shares of Glencore soared, fueled by rising iron ore prices and the announcement of a $7.7 billion refinancing package that largely removed concerns about the company’s ability to service its debt. Shares of mining rival Anglo American also moved sharply higher.
In fixed-income markets, European corporate debt rallied on the ECB’s announcement that it would begin buying corporate bonds as part of its quantitative easing program. Taking advantage of a favorable market, Anheuser-Busch InBev sold €13 billion of bonds in mid-March, the largest-ever sale of euro-denominated corporate debt. The deal included €2.8 billion of nine-year notes with a 1.5% coupon. The negative interest rate environment and safe-haven buying early in the quarter also boosted government bonds. The yield on Germany’s benchmark 10-year note fell 48 basis points to end the period at 0.15%, close to an all-time low.
Japanese equities fell sharply during a volatile first quarter as global concerns added to worries about sluggish domestic growth, a strengthening yen and the slumping banking industry. In late January, the Bank of Japan adopted negative interest rates amid a fourth-quarter contraction and persistently low inflation, hoping to stimulate the economy. Japanese equities shed 13%, lagging most other markets. Other developed countries in the region fared better, although the MSCI Pacific Index still declined 9%. The Japanese yen, which had weakened for years, reversed course and gained 7% against the U.S. dollar.
Japan’s economy contracted for the fourth time in seven quarters, increasing pressure on policymakers to bolster growth. Industrial output fell 6.2% in February — the largest monthly decline since the March 2011 earthquake — as falling exports reduced demand. Inflation was flat in February, although prices excluding food and energy continued to accelerate slowly, rising 0.8% from last year. Despite sluggish wage growth, household spending increased in February for the first time in six months, beating economists’ forecasts for a moderate decrease.
All sectors finished in negative territory. Financial stocks shed 19%. Shares of the three largest banks each lost more than 20% during the quarter as they struggled through the new era of negative interest rates. However, several real estate investment trusts rose by double digits. The strengthening yen negatively affected exporters, including automobile producers. Shares of Toyota retreated 19% as the world’s largest automaker halted all domestic production for nearly a week following a manufacturing plant explosion. Defensive sectors, such as consumer staples and telecommunication services, held up relatively well.
The MSCI Australia Index declined 3%. Most stocks rose, but the index was dragged down by double-digit declines from the heavily weighted megabanks. Several metals and mining companies rose sharply as commodity prices rebounded, particularly gold and copper. Shares of Newcrest Mining, South 32 and Fortescue Metals each spiked more than 30%. The Australian dollar gained 6% against the greenback.
Hong Kong equities were volatile but finished the quarter slightly lower. Macau-based casino stocks appreciated strongly; gambling revenue declined in February for the 21st consecutive month, but the decrease was the smallest in 20 months and visitor traffic has recently picked up. The financials sector lagged, particularly real estate firms. Peaking property values and accelerating mortgage rates have raised concerns over the increasing unaffordability of housing.
Emerging markets snapped back after a rocky start to the year. Gains were fueled by a rebound in commodity prices, stimulus measures from central banks around the world and expectations for a slower pace of rate hikes by the Federal Reserve. The MSCI Emerging Markets IMIadvanced 5%, with stocks in the materials and energy sectors leading gains. Health care led declines. U.S. dollar–denominated bonds, as measured by the J.P. Morgan EMBI Global Index, gained 5.2% as investors searched for higher yields. Local currency debt, as measured by the J.P. Morgan GBI-EM Global Diversified Index, rose 11% in dollar terms as most currencies strengthened against the U.S. dollar.
Brazilian stocks rallied on fresh hopes for political change and a recovery in commodity prices. The MSCI Brazil IMI soared 28%. Speculation mounted that President Dilma Rousseff would face impeachment, a move investors are hoping will set the stage for much-needed economic reforms in a country long mired in a recession and a corporate corruption scandal. The real rose 12%, the strongest gain against the dollar for an emerging markets currency. Shares of BM&F Bovespa, which operates Brazil’s equities and derivatives exchange, surged on renewed investor interest in the country. Elsewhere in Latin America, Mexican stocks rose 8%. Mexico’s central bank raised its benchmark interest rate by 50 basis points in mid-February to help stabilize the peso, which depreciated 1% against the dollar after touching a record low against the greenback earlier this year.
Returns in Asia were mixed. The MSCI Indonesia IMI climbed 11% as the country’s central bank cut interest rates three times during the quarter. In other moves to stoke economic growth, the Indonesian government opened up more industries to direct foreign investment and eased reserve requirements for banks. The rupiah gained 4% against the dollar. Indian equities fell 4% amid concern about the strength of corporate profits and rising doubts about Prime Minister Narendra Modi’s ability to pass key economic legislation. An increase in nonperforming loans has also weighed on the market.
Chinese stocks dropped as concerns grew about the health of China’s economy and the efficacy of its monetary policy. The MSCI China IMIlost 5%, clawing back much steeper losses from early in the quarter. Government leaders took selective actions to curb capital flight and made further moves to help sustain economic growth, including cutting taxes on home purchases and reducing the amount of cash banks must hold as reserves. But questions remained whether these measures would be sufficient to stem the deceleration in gross domestic product growth, which has declined to 6.9% annualized.
Russian stocks surged as Brent crude prices climbed above $40 a barrel and as hopes increased that Russia and other oil-producing nations could agree to curb production. The MSCI Russia IMI rose 16%, with shares of energy giants Gazprom and Lukoil benefiting from the rise in oil prices. Gazprom also secured a $2 billion loan from the Bank of China. The ruble rose 9% against the dollar. Meanwhile, Russia’s central bank continued to keep interest rates unchanged despite calls from policymakers and businesses to cut them further.
Turkish equities posted strong gains despite geopolitical turmoil. The MSCI Turkey IMI increased 21%, driven by further monetary easing in Europe and broad market appetite for riskier assets in the emerging markets. Turkey’s central bank cut interest rates by 25 basis points to 10.5% in late March, marking Turkey’s first rate cut in 13 months. Top government officials had been calling for a rate cut to help spur economic growth.
South African stocks rose as a rally in shares of mining companies helped to offset ongoing political and economic difficulties. The MSCI South Africa IMI climbed 15%. Shares of AngloGold Ashanti skyrocketed on cost-cutting efforts and rising gold prices. Meanwhile, President Jacob Zuma came under further pressure as reports surfaced of cronyism in his administration. The country’s central bank also raised interest rates for a second time this year to combat rising inflation.
Mexico and several Latin American countries tapped bond markets amid renewed appetite for emerging markets debt. Mexico sold $2.25 billion in 10-year bonds. It also raised €2.5 billion ($2.8 billion) in the eurobond market. Brazil netted $1.5 billion in the country’s first bond sale since 2014. Chile raised €1.2 billion ($1.3 billion) in a eurobond sale, while Peru sold €1billion ($1.1 billion) of notes. In the corporate market, state-run Mexican oil giant Pemex raised $5 billion. Femsa, which runs Latin America’s largest convenience store chain, sold €1 billion ($1.1 billion) of seven-year eurobonds.