5 Big Surprises In 2015

Investors had big expectations for 2015. We were six years into a bull run, and mainstream equity markets—from the FTSE 100 and the S&P 500 to the Nikkei and the Topix—hit record highs. Exchange traded fund inflows continued to break new records. The currency hedging phase had truly taken off and we were clamouring for new currency hedged ETFs.

We were optimistic, but we also had concerns—central banks had still not raised interest rates, deflation was taking hold, and bond liquidity became an increasing source of anxiety.

ETF Report UK looks back at the direction of capital markets over the past 12 months to outline the top five surprises—in other words, the most extreme movements that even the most seasoned investor might not have foreseen.

China Went Into Free Fall
Very few investors would have anticipated the flash crash on the morning of 24 Aug., especially after the incredible run-up Chinese stocks had been seeing over the prior 12 months.

As the Chinese government took major interventions to prop up its own stock market—and failed—it lost credibility, thereby exacerbating the downturn. Chinese stock markets are known to be full of leveraged bets, even among retail investors, and official economic data like GDP growth remains distrusted.

Further Collapse Of Oil Price
As Jeremy Siegel highlights in the main feature of this issue on page 9, oil took a second hit this year. The price of the black stuff per barrel had already fallen last autumn by about 50% to $60 per barrel (p/b), by high stockpiles, low demand and a refusal by OPEC to slash production.

As of 7 Oct., light, sweet crude oil prices were $47.81 p/b and Brent oil was $51.83 p/b. Shockingly, Goldman Sachs forecasted crude oil prices to hit just $20 p/b in 2016 in a “worst case scenario.”

Central Banks Fail To Raise Rates
What, again? Most economic commentators shared a consensus that both the US Federal Reserve and the Bank of England would raise interest rates in 2015 as economic data improved, after failing to raise rates during the latter part of 2014.

At the time of writing, there has still not been any action. US-based investment adviser and author David Kotok accused the Fed of “misleading” businesses with its communication, while Source Head of Research Paul Jackson said BoE governor Mark Carney will simply follow the Fed.

German Government Bond Yield Goes Negative
In February, Germany shocked the world when its bond yields fell into negative territory for the first time in history as loose monetary policy in Europe retained its grip.

The situation reached a trough in April. Five-year sovereign debt from the largest engine of the eurozone slipped to a negative yield of 0.15% as borrowing costs and inflation fell, while 10-year bund yields dropped as low as 0.075%.

US 3-Month Treasury Yield Goes To Zero
US Treasury yields, on both longer- and shorter-dated bonds, have fallen consistently since June 2014 as investors flocked to safer assets in anticipation of interest rate hikes.

The US government sold $21 billion worth of three-month Treasury bills with 0% yield on 5 Oct., bringing US sovereign debt yields closer in line with global peers in a world of low rates. The move follows other countries—Switzerland, Japan, Finland and France—that have sold sovereign debt at zero or negative yields.