Global stocks delivered essentially flat returns as investor enthusiasm for the U.S. economic recovery was offset by concerns over a sharp slowdown in China. Aggressive central bank stimulus measures continued to support markets in Europe and Japan, while the U.S. gradually stepped back from accommodative policies. Emerging markets stocks generally lagged their developed-market counterparts by a wide margin. Mergers-and-acquisitions activity reached a record high, fueled by cheap financing.
Defensive stocks outpaced economically sensitive sectors. Health care and consumer staples stocks rallied, while energy and materials stocks plummeted amid falling prices for oil and other commodities. At the end of the year, the U.S. Federal Reserve raised interest rates for the first time in nearly a decade, setting the stage for tighter monetary policy in the years ahead. The U.S. dollar rose against the euro and most other currencies.
Index Returns (Quarter)
U.S. stocks ended the year up modestly from where they had started. The Standard & Poor’s 500 Composite Index climbed to an all-time high in May, but worries about global economic growth, the interest rate outlook, corporate earnings and the health of the high-yield bond sector weighed on equities in the second half of the year. The S&P 500 had a total return of 1%, while the Dow Jones Industrial Average was flat. The Nasdaq composite Index advanced 7%.
Stocks in several sectors were buoyed by mergers and acquisitions as companies sought to make deals before interest rates started to rise. Sluggish top-line growth, investor activism and tax reduction also contributed to the increase in M&A activity. With more than $5 trillion in deals, 2015 was the biggest year ever for global M&A, according to data provider Dealogic. U.S. transactions topped $2.5 trillion, led by record activity among health care and information technology firms.
Energy, which had the only negative sector return in 2014, fell a further 21%. Companies continued to lose ground amid a glut of crude oil, whose price touched a multiyear-low around $34 a barrel in late December. Pipeline operator Kinder Morgan saw a 63% drop in its share price and announced it would slash its dividend by 75%. Integrated oil majors such as Exxon Mobil and Chevron fared somewhat better, with year-to-date losses in the low- to mid-teens, while firms with refining operations advanced; shares of both Tesoro and Valero gained more than 40%.
A steep decline in metals prices hurt the materials sector, which fell 8%. Gold and copper miner Freeport McMoRan said it would suspend its dividend to preserve cash as its shares lost more than two-thirds of their value. Falling commodity prices were also an impetus for the announced merger of Dow Chemical and DuPont, which plan to combine into an entity valued at more than $120 billion before splitting into three publicly traded concerns. Other laggards included dividend payers sensitive to interest rate moves, including utilities and real estate investment trusts within the financials sector, which lost 2%.
The health care sector saw the largest tie-up of the year and the second largest on record in November as pharmaceutical giant Pfizer purchased Ireland-based rival Allergan for around $160 billion. Allergan also figured in a large deal earlier in the year, selling its generics business to Teva. Elsewhere in the sector, health insurer Anthem agreed in July to acquire Cigna for around $48 billion. Health care stocks rose 7% overall.
Consumer discretionary had the best sector return, rising 10% on the back of price gains for several large companies, including Netflix and Amazon, whose shares more than doubled. Amazon’s ascension was largely due to optimism for its cloud-computing operations, which also supported gains by Microsoft and Alphabet (Google’s newly organized holding company) within the technology sector. Accessing the fast-growing cloud segment prompted privately held Dell to offer $67 billion for data storage firm EMC in October in the largest-ever tech acquisition.
The U.S. economy improved in fits and starts but ultimately was deemed healthy enough to support a rise in interest rates. Gross domestic product growth was on track for a 2% annual expansion. Employers added an average of 220,000 new jobs monthly in the 12-month period through November, and the unemployment rate declined to 5% in November from 5.6% at the start of the year. Consumer price inflation for all items reached 2%, but core inflation, which excludes food and energy, was just 0.4% due to plunging energy costs. In the housing market, home prices and sales continued to advance overall, though the pace of increases slowed.
The Federal Reserve raised the federal funds target rate by 25 basis points in December to a range of 0.25% to 0.50%, bringing an end to seven years of near-zero rates and months of speculation. Speaking after the announcement, Fed Chair Janet Yellen said the decision reflects confidence that the U.S. economy is on a path to “sustainable improvement.”
Bonds advanced modestly as investors awaited the Fed’s much anticipated rate hike. The Barclays U.S. Aggregate Index rose 0.5%, a weaker result than 2014’s 6.0% gain. Treasury Inflation Protected Securities lost 1.4% as oil prices declined sharply throughout the year and kept inflation expectations low. The yield on the benchmark 10-year Treasury note rose 10 basis points to end the year at 2.27%. Corporate bonds fell 0.7% and spreads to Treasuries widened by 34 basis points to 165 basis points. High-yield corporates lost 4.5% as the sector struggled, particularly toward year-end. Mortgage-backed securities and municipal bonds advanced 1.5% and 3.3%, respectively. Investment-grade corporate bond issuance totaled $1.4 trillion in 2015, easily outstripping 2014’s record high. Some of the borrowing was driven by a strong year for mergers and acquisitions, as well as by companies seeking to lock in low rates before the Fed move. M&A activity provided the basis for the year’s three biggest deals – Actavis’s $21 billion offering to finance its purchase of Allergan, AT&T’s $17.5 billion in bonds to buy DirecTV and AbbVie’s $16.6 billion in new debt to fund its Pharmacyclics acquisition.
European stocks rose in local currency terms, supported by a declining euro and aggressive stimulus measures from the European Central Bank. The euro tumbled to multiyear lows against the U.S. dollar, boosting European exports and sending consumer-related stocks higher. An easing of the long-running debt crisis in Greece also helped to allay investor fears of a euro-zone break up. Overall, the MSCI Europe Index gained 5% in local currency terms but declined 3% for dollar-based investors.
ECB President Mario Draghi unveiled a new stimulus program in March, aiming to jumpstart lending activity and spur economic growth. The €60-billion-a-month bond-buying initiative sparked a strong rally in European sovereign debt, but failed at least initially to raise inflation closer to the ECB’s goal of roughly 2%. In December, consumer prices rose a scant 0.2%. Meanwhile, euro-zone GDP growth for the third quarter stood at a tepid 0.3%, down from 0.4% in the prior quarter.
Greece’s protracted debt crisis rattled markets over the summer after Greek voters rejected the terms of a financial bailout package, raising fears that the country could be expelled from the 19-member euro zone. A last-minute compromise resolved the immediate crisis, but only after Greece defaulted on a $1.7 billion loan payment to the International Monetary Fund. European lenders ultimately approved an €86 billion bailout package that imposed significant budget cuts and other austerity measures but allowed Greece to remain in the currency bloc.
Consumer staples stocks led markets higher, rising 15% in aggregate. Shares of Anheuser-Busch InBev rallied on investor optimism for the beer maker’s plan to acquire rival SABMiller for $108 billion. Unilever shares advanced as the consumer products giant benefited from favorable currency trends and better-than-expected sales growth in emerging markets, including China and India. Shares of Imperial Tobacco and British American Tobacco also enjoyed substantial gains.
Information technology stocks advanced 14% amid an improving profit outlook for some bellwether companies. SAP shares gained after the software giant reported better-than-expected sales growth in its cloud-computing products. The telecommunication services sector rose 10% as investors grew more optimistic about the expanding use of wireless devices. Deutsche Telekom shares moved higher on an improving global sales outlook driven primarily by subscriber growth at U.S. subsidiary T-Mobile.
The consumer discretionary and health care sectors rose 10% each. Daimler shares rallied on investor expectations for strong global sales in its Mercedes-Benz unit, boosted by a weak euro and a probable record-breaking year for U.S. auto sales. Shares of Inditex advanced as the fashion retailer opened new stores and reported improving profit growth. Among health care stocks, Novo Nordisk shares moved sharply higher after the world’s leading supplier of insulin raised its full-year profit forecast.
Energy and materials stocks lost the most, declining 11% and 12%, respectively. Rapidly falling oil prices, China’s slowing economy and waning global demand for raw materials wreaked havoc in both sectors. Mining titan Glencore and oil giant Royal Dutch Shell were among the largest detractors in the MSCI Europe Index. In the financials sector, shares of Banco Santander plummeted on investor worries about the Spanish bank’s high exposure to the troubled Brazilian economy.
In bond markets, the ECB's stimulus measures sparked a debt rally for much of the year, driving down yields for many government and corporate bonds. Yields on the short-term notes of several European nations moved into negative territory, hitting a series of record lows. The yield on Italy’s benchmark 10-year note declined 29 basis points to close the year at 1.6%. In Germany, historically low bond yields rose slightly toward the end of the year as investors anticipated a Fed rate hike. The yield on Germany’s 10-year note climbed 9 basis points to end the year at 0.63%. The euro declined 10% against the dollar.
Japan was among the best-returning developed stock markets, boosted by its large scale quantitative easing program, shareholder-friendly corporate actions, and a persistently weak yen. Equities rose sharply over the first half of 2015 and the Nikkei 225 reached its highest level in more than 18 years. After falling in the summer global selloff, stocks rebounded with a strong fourth quarter, and the MSCI Japan Index finished the year with a 10% gain. The broader MSCI Pacific Index gained 6% as other developed markets in the region lagged.
Despite strong equity gains, Japan’s growth and inflation remain muted. The economy narrowly avoided falling into its second recession in the past year and a half, as revised third-quarter data showed moderate growth. The Bank of Japan maintained its monetary stimulus plan to annually purchase ¥80 trillion of assets throughout the year, but despite the asset purchases, inflation remains well below the Bank of Japan’s 2% target. Prices excluding energy and food increased only 0.9% in November and headline inflation was relatively flat throughout much of the year. Some other economic indicators have been more positive. Machinery orders, considered a leading indicator for private sector capital investment, expanded at their fastest pace in 19 months in October. The unemployment rate fell slightly during the year, touching a 20-year low in October.
The yen reached a 12-year low against the U.S. dollar earlier in the year, and weakened 16% since mid-2014. Exporters have benefited from the weak yen, as their products become more competitive in global markets. Several automobile companies gained, including Honda, Nissan and Toyota. Shares of Murata Manufacturing, a producer of smartphone and onboard computer parts, jumped following reports that it would build new plants to help meet increased demand for their products. Japan Tobacco rose as it increased its dividend following a sale of its beverage unit for $1.2 billion. Toshiba was a notable detractor to index returns, as the company was dragged down by an accounting scandal throughout the year.
Health care led all sectors, rising 35%. Pharmaceutical firms Ono, Eisai, and Shionogi were all among the highest returning stocks in the index as investors have been excited by the companies’ strong pipelines of new drugs. Mitsubishi UFJ and Mizuho Financial led banking stocks as they have returned value to shareholders with higher dividends or share buybacks. Shares of several telecommunication services also gained. NTT Docomo, NTT Corp, and KDDI climbed as they reported robust profits. However, SoftBank was weighed down by Sprint, its struggling U.S.-based subsidiary.
Australian equities edged up 1% amid mixed results from large banks and weakening commodity prices throughout the year. Banking stocks were negatively affected by stricter capital requirements and Australia’s sluggish economy, although some finished the year stronger after raising interest rates on variable interest loans. Investment bank Macquarie advanced 48% after raising its full-year forecast. In the materials sector, BHP Billiton fell 31% as it faces declining profits and the potential fallout of a fatal mining disaster in Brazil. The Reserve Bank of Australia cut interest rates twice in the first half of the year, to a record low of 2%, which has put pressure on the Australian dollar. The currency depreciated sharply for the third consecutive year, weakening 11% against the U.S. dollar.
Hong Kong–listed equities fell 1%, hurt by slowing growth in China. Macau-based casino operators again weighed on the market, with the five largest Macau-based gaming companies each declining by at least 25%. Real estate companies also struggled as the prospect of higher interest rates caused speculation that property values have peaked. AIA Group was a bright spot, gaining as strong sales of insurance products outweighed fears over slowing economic growth in Asia.
Emerging markets trailed developed-market stocks for a third straight year, dragged down by weak commodity prices, a slowing global economy and the specter of rising U.S. interest rates. Most world currencies fell against the U.S. dollar, with many declining by double-digits on a percentage basis. The MSCI Emerging Markets Investable Market Index stumbled 14%, led by declines in the materials, utilities and telecommunication services sectors. Health care was the only sector to finish in positive territory. Emerging markets U.S. dollar–denominated debt as measured by the J.P. Morgan EMBI Global Index rose by 1% as investors found higher yields in developing markets attractive, but currency depreciation weighed on local currency bonds; the J.P. Morgan GBI-EM Global Diversified Index declined 15% in U.S. dollar terms.
Asian markets lost ground. The MSCI China IMI fell 6% as China’s government pursued an anti-corruption campaign and pressed ahead with reforms. In a bid to stimulate the economy, China’s central bank cut interest rates five times, lowered the amount of cash banks are required to hold as reserves, and announced a surprise devaluation of the renminbi. The government also enacted polices to encourage home and car purchases. Elsewhere in Asia, the MSCI India IMI closed 5% lower as exuberance regarding reforms and economic improvements seemed to subside over the year. The Indian rupee shed 5% against the U.S. dollar. Meanwhile, Indonesian equities dropped 22% as growth fell to its slowest pace since 2009 despite the government’s sweeping economic stimulus plan. The rupiah fell 10% against the U.S. dollar. South Korean equities declined 4%, while stocks in Taiwan lost 11%.
Brazilian equities plunged, roiled by a deep recession, persistently low commodity prices and a government corruption scandal that stalled much-needed reforms. Political turmoil reached a fever pitch in December as President Dilma Rousseff faced impeachment proceedings and a new finance minister was named. Moody’s also signaled it may join S&P and Fitch in stripping Brazil of its lowest investment-grade credit rating. The MSCI Brazil IMI tumbled 42%, hurt by steep drops in commodity-related stocks. Ordinary shares of oil producer Petrobras lost 33% as the state-owned firm was ensnared in the corruption scandal and its massive debt load was cut to below-investment-grade status by credit rating agencies. Vale shares collapsed 43% as iron ore prices sank to their lowest level since 2009 due to weak demand from China; the stock was also hurt by a deadly disaster at one of the company’s jointly run mines. Brazil’s political and economic instability rocked its currency, which declined 33% against the U.S. dollar. Local currency bonds fell 31% in U.S. dollar terms. Elsewhere in Latin America, Mexican stocks dropped 14% as weak oil prices curbed output and the country’s central bank lowered its growth forecasts.
Russian stocks rebounded after steep losses in 2014 despite weak oil prices, international trade sanctions and escalating geopolitical tensions with Turkey. The MSCI Russia IMI gained 5%. Russia’s central bank continued to ease monetary policy, cutting interest rates five times to help the economy. The ruble fell 18% against the U.S. dollar. Russia’s local currency bonds rose 8% in U.S. dollar terms amid speculation the country’s central bank would cut interest rates. Turkish equities lost ground amid the prospect of a U.S. interest rate hike, political turmoil and rising geopolitical tensions in the Middle East. The MSCI Turkey IMI slid 31%, and the Turkish lira depreciated 20% against the U.S. dollar. South African equities tumbled 26% as the economy slumped on falling metals prices and electricity shortages. President Jacob Zuma changed finance ministers twice in early December, adding to the political stress. The rand declined 25% against the dollar. Local currency bonds dropped 28% in U.S. dollars amid a weakening economy and fiscal challenges.
In corporate bond issuance, a number of energy companies issued debt to help offset the negative implications of falling oil prices. Mexican state-run oil firm Pemex sold $6 billion in debt to help fund its $27 billion investment plan. Similarly, China Petrochemical (Sinopec) sold $6.4 billion via a combination of U.S. dollar and euro-denominated debt; the sale marked Asia’s third-biggest bond sale on record. State-owned China National Offshore Oil Corporation (CNOOC) sold nearly $3.8 billion in U.S. dollar debt. Meanwhile, Saudi Arabia sold $5.3 billion of bonds as falling oil prices and high public spending weighed on its finances. Columbia sold $2.5 billion in two international debt sales and Zambia sold $1.25 billion in eurobonds to help fund infrastructure development.