2015 has been an eventful year in the financial markets. Long term investors have seen their 2014 gains wiped out. Last year, Bill Ackman was the most successful hedge fund manager. His fund went up by 40%. Sadly, this year he had the worst year ever. His funds were down 20.2%. The same happened for David Einhorn and all the major hedge fund managers. Bond funds such as Third Avenue closed shop as a result of losses which accelerated redemptions. Long term currency investors who held emerging markets currencies suffered huge losses. For day traders, 2015 was an amazing year with volatilities climbing the roof. In the main Forex trades, the following were achieved. The AUD/NZD pair reached a record low. The USD/JPY reached a 12 year high. EURUSD reached a 12 year low. USD/CAD reached a 11 year high. EUR/GBP reached a 7 year low. AUD/USD reached a 6 year low. NZD/USD reached a 6 year low. USD/CHF reached a 5 year high while GBP/USD reached a 4 year low. These moves happened as a result of increased divergencies in monetary policies by central banks. Also, the United States saw the first rate hike in nearly a decade. Other central banks such as Eurozone, China, Canada, Australia, and New Zealand eased their monetary policy. Commodities too collapsed.
While the Fed dominated financial headlines this year, this will continue in the upcoming year. Investors around the world will be watching closely all the moves made by Fed. In fact, I anticipate the greatest risk in the coming year to be the Federal Reserve. This is because investors will have a keen interest on the key decisions made by the Fed. Many investors anticipate 4 rate hikes in the coming year. This will signal increased levels of confidence in the United States economy. It will also signal a strengthening dollar. In fact, the first quarter will be a good one for the United States dollar provided that the fed don’t backtrack on their hawkish views. In addition, I anticipate that there will be increased spending in the economy as a result of the warm el-Niño weather and the falling gas prices.
While 2015 has been a relatively bad year for commodities, I believe that 2016 will be worse. As such, I believe that the commodity prices will bottom in 2016. This will be attributed to a number of factors. One, the strong dollar will definitely lead to commodities such as oil (which are priced in dollars) to become expensive. This will lead to reduced demand. At the moment, oil supplies around the world are increasing. Therefore, with an increasing supply and a weak demand, the result will be lower prices. Remember that the US recently removed the 40 year ban on oil export and Iran is expected to begin exporting its oil early in the year. Goldman Sachs recently released a note where they anticipated that oil prices could go as low as $20 a barrel. Continued decline in commodity prices will have serious implications to various economies. For instance, Australia is a key commodity exporter. If commodity prices fall, there will be trade imbalance which will have serious implications to its economy.
Diminishing stock market returns
The past few years have been remarkable for the corporate world. With money being free, corporate profits have surged. Companies with huge piles of cash overseas have taken to the financial market to borrow money. This will not be the case in 2015 as the fed shifts from an era of easy money. In fact, investors should expect single digit growth in the coming year. This will lead to an increase in corporate profits at a diminishing rate.