Monthly Market Commentary: December
4 min read 07 Jan 2016, 05:18 PM ISTAfter holding rates at near zero levels for seven years, the Fed hiked rates by 25 basis points in the middle of December
Premium
December was all about the US Federal Reserve’s rate hike decision. After holding rates at near zero levels for seven years, the Fed hiked rates by 25 basis points in the middle of December. (One basis point is one-hundredth of a percentage point.) However, markets in the US ended the month in the negative as the rate cut was already factored. The Dow Jones index lost 2.6% and the S&P 500 fell by 2.8% last month. Volatile oil prices and an unexpected increase in jobless claims made matters worse. On the whole, 2015 was not a good year. Experts believe that the crash in oil prices, slowdown in China, and the rate hike speculation, had a negative impact on US stocks.
Markets in Europe fared no better in December—France’s CAC40 was down 6.47% and Germany’s Deutsche Boerse posted losses of 5.62%. The European Central Bank not delivering on its promise of hiking rates had a negative impact. However, European markets managed to end the year with good gains.
Asian markets, except for Japan and India, managed to outperform global peers in December. The Shanghai Composite was up by 2.72%, while Taiwan’s TSEC 50 was up by 0.3%. China’s macroeconomic indicators for November revealed an overall uptick in industrial production, investments and retail sales.
In India, equities ended the year with losses of over 5%. December added to the losses as the S&P BSE Sensex was down by 0.11%. This is despite foreign institutional investors (FIIs) and domestic institutional investors (DIIs) buying Rs.205 crore and Rs.4,544 crore worth of shares, respectively, in December. India’s core sector contracted by over 1% in November. Also, little progress on the goods and services tax (GST) Bill did not help. With India’s Purchasing Managers’ Index (PMI) showing a contraction for the first time in two years and corporate earnings looking weak, investors seem to be on the edge.
Equity
December was a better month for the Indian market, compared with November. Even though Sensex posted losses, the CNX Nifty closed the month marginally positive, rising 0.14%. Recovery of metal stocks in December and the stellar performance of healthcare scrips, helped limit losses for the year. Apart from healthcare, consumer durables managed to post good gains in 2015. The implementation of the 7th Pay Commission is expected to help the consumer durables industry. On the other hand, commodity-linked sectors such as BSE Metal and BSE Oil ended the year with heavy losses thanks to the fall in commodity prices. The highlight of 2015, however, was that mid- and small-caps outperformed larger stocks during the year and might continue to do so in 2016.
Fixed Income
Indian bond yields fell after the US Fed hike, but rose subsequently and remained at high levels. The 10-year benchmark yield, which fell to 7.70% in the middle of December, reached 7.76% by the end of the month. FIIs continue to show interest in Indian government paper due to high yields. They invested $8 billion in the Indian debt market last year. Government securities yields could come down if supply falls in the coming months. A lot would depend on how the government handles its fiscal deficit, how inflation pans out and the outcome of the budget session. Yields are expected to remain range bound in the initial months of 2016.
Even though there was short relief rally after the Fed rate hike, prices continue to remain volatile. Internationally, gold prices rose to $1,080 after the hike, but fell to $1,061 by the end of December. Indian gold prices fell close to 1%. Gold prices are expected to trade with a downward bias in the coming months as global investors look to a strengthening US economy and the dollar.
Crude Oil
Crude oil prices fell below $35 per barrel last month—touching a seven-year low—on the back of excess supply. Members of the Organization of the Petroleum Exporting Countries do not have any consensus on production levels. And even though it is unclear when this over supply might stop, better sense is expected to prevail over the coming months as oil hits new lows.
Mint Money Take
The new year has started on the bad note with India’s manufacturing PMI falling to 49.1 from 50.3 in November. Reports that corporate earnings might contract in the December quarter added to the woes of investors. However, long-term investors should draw comfort from the fact that the global manufacturing PMI has also been falling. Further, manufacturing growth was seen at a three-year low in US. So, just like India, other countries are looking at a period of slow growth, drop in manufacturing and a lower interest rate regime. And it should be noted that India has seen good traction by FIIs, both in equity and debt, in 2015, which is expected to continue into 2016. Indian investors in general are also seen remaining confident about markets doing well in the long run. Data from Crisil shows that assets under management of Indian mutual funds were up by 21% year-on-year in 2015. So, investors should remain unperturbed in the face of short-term volatility expected in the coming months.
