Global Stocks In Retreat

12/21/2015


Investors have cooled on stocks in the past year, with equity markets slumping across most geographic regions. MSCI indexes for the Americas, Asia, Europe, and Pacific markets have declined between 3% and 8% in 2015, as shown in the table below.

WINNERS AND LOSERS
Below we look at year-to-date index returns for key developed and emerging countries, including the year's biggest winner and loser. The economies for most of these countries should grow next year, based on projected real gross domestic product (GDP), which adjusts for inflation.
Country
Year-
To-Date
Price Change
(%)
Forecasted
2016 Real
GDP Change
(%)
Hungary
28.4
2.5
Japan
3.4
1.0
Russia
2.6
(0.4)
U.S.
(0.9)
2.5
France
(2.2)
1.6
Germany
(5.8)
1.8
India
(11.5)
7.5
China
(12.1)
6.4
United Kingdom
(12.4)
2.3
Canada
(24.5)
2.0
Brazil
(40.2)
(2.0)
Greece
(65.4)
(1.3)
Sources: MSCI, Blue Chip Economic Indicators, World Bank, and European Commission.Ā  Returns as of Dec. 15.

Just a handful of individual countries have posted gains. No country's stock market has been stronger than Hungary, up 28%, or worse than Greece, down 65%. Under difficult conditions, the U.S. stock market has held up fairly well, falling less than 1% for the year.

The pace of the Federal Reserve's interest-rate hikes could play a large role in stocks' fortunes in the coming year. Higher rates mean U.S. companies' borrowing costs will rise. Borrowing will also become more expensive for some foreign countries, especially emerging markets, which could crimp government spending and trigger defaults on public debt.

Anticipation of the Fed's rate hike, combined with weakness in commodities, contributed to the poor performance of emerging-market stocks this year. So far this year, the MSCI Emerging Markets Index has declined 19%. The global oil market remains oversupplied, pushing oil prices in December to their lowest level since 2009. If prices for oil and other commodities remain near multiyear lows, emerging markets, which often rely on raw materials to generate economic growth, could struggle to rebound.

The Fed's rate hike also implies the central bankers see a stronger U.S. economy — presumably one that will need lots of raw materials. However, weakness in China, by far the world's largest emerging economy, should more than offset any rise in global demand.

China's decelerating economic growth has dominated financial news this year. Far less has been made of India surpassing China to become the fastest-growing economy in the world. India's real gross domestic product (GDP) is expected to grow 7.4% in 2015 and 7.5% in 2016, according to Blue Chip Economic Indicators, versus China's projected growth of 6.9% and 6.4%, respectively. Demographic trends also favor India's younger and faster-growing population. Unlike China, India seeks to expand its manufacturing sector. However, China's economy is about five times the size of India's, so India alone cannot make up for China's slowing growth.

In Europe, more countries are participating in the economic recovery. Consumer spending has also begun to bounce back, with retail sales rising in the first 10 months of 2015 at their fastest pace since 1994. Consumer sentiment remains upbeat and borrowing rates low, which should help sustain growth. Earlier this month, the European Central Bank extended its quantitative-easing program, designed to reduce the risk of deflation and support economic growth.

The U.S. accounts for 16% of the world's GDP. Stocks in the S&P 500 Index average P/E ratios of 21, in line with their 20-year average. Rising wages from the tightening labor market could limit profit growth in the absence of higher sales. But if the U.S. economy proves capable of withstanding additional rate hikes, the aging bull market may find the legs to run higher.


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