Review and Outlook
After a marked decline in the third quarter, the fourth quarter of 2015 began with a powerful rally in global equities, commodities, and credit. Coincident with the Fed's deferral of an October rate hike, indicators suggested improving economic growth, global trade, and stabilization in China and of the RMB. Such stability inspired the Fed to signal the start of a rate hike cycle in December, which seemed to act as an immediate financial tightening and stunt the rally. An increase in terrorism and rising Middle East tensions exacerbated the mid-quarter rise in risk premium, leading global equities to fade into year end.
For the year ahead, we expect further volatility. In our view, the key variables are the Chinese economy, policy and the RMB; the slope and duration of Fed tightening; the outlook for commodity and oil prices; and the geopolitical implications of increasing Mideast hostilities. We see the first two variables as directly related; any increase in the market-discounted rate of Fed tightening will force a more aggressive policy response from China and increase the risk of a more material RMB depreciation. This phenomenon was on display through the second half of 2015. RMB depreciation acts as a safety valve for China and deflects the deflationary impulse being absorbed back at the rest of the world, weighing on global prices and asset values, particularly in the most vulnerable and leveraged countries and sectors. In the zero-sum world of subpar global economic growth and credit saturation, we should continue to expect the "whac-a-(deflation)mole" policy response initiated by the Fed in 2009 and carried on by the Bank of Japan and the ECB; in our view, it is now simply China's "whac."
The silver lining is that we believe we are in the advanced stages of a bear market in the emerging markets, where much of the damage has already been done. We envision three potential pathways to a major inflection point, which, for the first time in several years, we now see emerging on the horizon. The first two pathways, most likely triggered by an international credit event or RMB depreciation, would likely involve a final, ninth-inning decline, followed by an abrupt and sustainable recovery as the Fed reverses course. We believe the 1998 credit crisis and/or Euro-periphery crisis of 2012 serve as reasonable proxies for this scenario. In the third, and preferred, pathway, global growth and leading indicators would continue to improve upon what appeared a bottoming in early October; in effect, the Fed would now be appropriately hiking into a global re-acceleration, reducing the odds of a credit incident, and suggesting a re-acceleration of corporate earnings growth.
We believe RMB depreciation has emerged as a key catalyst, as China’s ability to underpin the RMB appears suspect following the brief period of stabilization that preceded November’s historic inclusion into the IMF basket of global reserve currencies. While we remain comfortable that our positioning is well aligned given the existing environment, we believe substantial investment opportunities lie ahead and are identifying specific candidates as well as a strategy to take advantage.
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Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending December 31, 2015 is not yet available
Yearly Attribution Analysis
The Yearly Attribution Analysis for period ending December 31, 2015 is not yet available
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