World Markets Review for Third Quarter 2015 | Capital Group

  • ACCOUNTS
  • INVESTMENTS
  • CLIENT SOLUTIONS
  • INSIGHTS
  • EVENTS
  • ABOUT US

Market Commentary

October 2015

World Markets Review for Third Quarter 2015

Global stocks tumbled amid increasingly alarming signs of an economic slowdown in China and uncertainty over U.S. monetary policy. Energy and materials stocks plummeted on worries about declining global demand for commodities. Defensive sectors, including consumer staples and utilities, generally held up better than cyclical stocks. Government bonds rallied and the U.S. dollar slipped against the euro and the yen. 

Index Returns (Quarter)

September 2015

Q3 2015

2015

U.S.

Dollar %

Local %

U.S.

Dollar %

Local %

U.S.

Dollar %

Local %

MSCI World

−3.7

−3.5

–8.4

−7.7

−6.0

−3.9

MSCI EAFE

−5.1

−4.8

−10.2

−9.0

−5.3

−0.9

MSCI EM IMI

−2.6

−1.3

−17.7

−12.0

−14.7

−6.6

MSCI Europe

−4.7

−3.9

−8.7

−7.0

−5.2

−0.3

MSCI Pacific ex Japan

−3.7

−3.0

−16

−10.7

−15.5

−6.5

S&P 500

−2.5

−2.5

−6.4

−6.4

−5.3

−5.3

MSCI Japan

−6.8

−7.9

−11.8

−13.7

 0.2

 0.1

MSCI UK

−4.5

−3.0

−10.0

−6.6

−8.2

−5.5

Barclays Global Aggregate

 0.5

 0.9

−2.3

Barclays U.S. Aggregate

 0.7

 0.7

 1.2

 1.2

 1.1

 1.1

J.P. Morgan EMBI Global

−1.4

−1.4

−2.0

−2.0

−0.3

−0.3

J.P. Morgan GBI–EM Global Diversified

−3.0

−0.3

−10.5

−0.5

−14.9

 1.7


MSCI index returns reflect net dividends. Source: RIMES

North America

After advancing in July, U.S. stocks sank under the weight of concerns about global growth, particularly in China. The Standard & Poor’s 500 Composite Index declined 6% for the quarter, while the Dow Jones Industrial Average and the Nasdaq Composite Index each lost 7%. The three indexes retreated into negative territory for the year to date. The period saw an upswing in volatility, with the CBOE Volatility Index (commonly known as the VIX) surging to an intraday high above 50 in late August after China surprised markets by devaluing its currency.

Utilities rose 5% and was the only S&P sector with a positive return. Energy and materials both lost 17% as the weak global environment and strong U.S. dollar pressured commodity prices. West Texas Intermediate crude oil futures fell to just over $45 a barrel, a decline of 24% over the quarter. Health care stocks were led down by biotechnology shares, which tumbled in late September after Democratic presidential hopeful Hillary Clinton unveiled a plan to rein in high drug prices.

Mergers-and-acquisitions activity remained brisk, adding to an estimated $3.2 trillion in deals announced for the year to date — on track to match 2007’s record pace. Teco Energy shares rose 50%, the biggest percentage gain in the S&P 500, as it agreed to be acquired by Canadian utility Emera for $6.5 billion in cash. Netherlands-based Altice bought Cablevision for about $17.7 billion in cash and debt, adding the New York–based cable system operator to a growing portfolio of U.S. assets; Cablevision shares advanced 36%. The prospect of an extended period of low crude oil prices spurred consolidation in the energy sector. The quarter was bookended by deals for pipeline operators: Marathon Petroleum purchased MarkWest Energy Partners for $20 billion in July, while Energy Transfer Equity announced it was acquiring Williams for almost $38 billion in September. Other large deals announced in the quarter included Berkshire Hathaway’s $37 billion purchase of Precision Castparts.

Slowing growth in China and depressed commodity prices took a toll on a number of companies. Heavy equipment maker Caterpillar cut its 2015 revenue forecast and said it would trim up to 10,000 jobs. Aluminum miner Alcoa, whose share price has tumbled in 2015 amid a decline in demand from China, announced it would spin off its “value-add” engineering and products businesses from its raw materials, metals and mining operations. On the other hand, Apple cited sales growth in China as a bright spot in July’s quarterly earnings report, but its share price retreated as its revenue forecast and iPhone sales fell short of some estimates.

U.S. economic data was generally positive. Gross domestic product growth for the second quarter was revised to 3.9% annualized due to increases in personal consumption expenditures, nonresidential fixed investment and exports. U.S. employers continued to add jobs, and the unemployment rate fell to a seven-year low of 5.1% in August. Housing market indicators offered mixed data. Prices for existing single family homes accelerated in July, according to the S&P/Case-Shiller Home Price Index, and housing starts were the highest in nearly eight years; however, the pace of existing home sales slowed in August.

The Federal Reserve opted to keep the federal funds rate near zero at its September meeting, which some observers interpreted as a lack of confidence in the U.S. economy. But later remarks by Fed Chair Janet Yellen caused markets to surge, albeit temporarily. Yellen cited improving labor conditions and expectations for an increase in inflation as reasons to expect a rate hike before the end of the year. On the budget front, Congress narrowly avoided another government shutdown, extending agency funding through December 11.

In bond markets, the Barclays U.S. Aggregate Index gained 1.2%. Bonds were volatile, though yields trended lower as concerns about China’s economy triggered an initial wave of buying. Yields came under renewed pressure following the Fed’s decision to keep rates on hold. The benchmark 10-year Treasury note’s yield ended 32 basis points lower at 2.04%. The low price of crude oil weighed on the outlooks for inflation and the businesses of energy-related issuers; Treasury Inflation Protected Securities and high-yield corporates shed 1.1% and 4.9%, respectively. Corporate spreads to Treasuries widened 24 basis points and corporate bonds gained 0.8%. Despite an August lull, activity in the new issue market was fairly brisk, with Gilead Sciences’ $10 billion bond sale among the notable deals. Municipal bonds gained 1.7%.

Europe

European stocks fell amid the turmoil in China and mixed reports about the health of the eurozone economy. Commodity producers and companies that derive a significant portion of their revenues from Asia had some of the biggest declines, although the losses extended across all sectors and all national markets in the 19-member euro zone. Overall, the MSCI Europe Index retreated 7%, its worst quarterly fall since 2011.

Eurozone economic activity rose just 1.5% on an annualized basis as both Germany and France grew at a slower pace than expected. Inflation declined slightly in September, fueling speculation that the European Central Bank may increase its €60-billion-a-month bond-buying program in an attempt to spur lending and boost consumer prices. Bonds rallied after ECB President Mario Draghi confirmed that the central bank stands ready to provide additional monetary stimulus if inflation weakens further. Eurozone inflation is running far below the ECB’s target of just under 2%.

Concerns about the debt crisis in Greece waned as snap elections on September 20 solidified the power base of Greek Prime Minister Alexis Tsipras. The prime minister briefly resigned in August in a maneuver widely interpreted as a bid to shore up support for an €86 billion bailout plan he negotiated over the summer with European leaders. Easily re-elected, Tsipras now has a mandate to move forward with the plan, which calls for strict austerity measures in exchange for further financial aid from eurozone lenders and the International Monetary Fund.

Energy and materials stocks suffered the biggest losses, declining 14% and 18%, respectively. Oil giants BP, Royal Dutch Shell and Total were among the top detractors in the MSCI Europe Index as falling oil prices continued to weigh heavily on earnings. BASF shares slipped as lower oil prices put pressure on its chemical and energy-related businesses. Shares of mining giant Glencore plummeted amid the ongoing slump in commodity prices and rising concerns about the company’s ability to service its heavy debt burden.

The consumer discretionary sector was also hit hard, losing 9% on China-related woes and an emissions scandal in the German auto industry. Volkswagen shares tumbled after the automaker admitted to U.S. regulators that it cheated on emissions tests, making it appear that its diesel engines were running cleaner than they really were. Volkswagen CEO Martin Winterkorn resigned as U.S. authorities launched civil and criminal investigations into the matter. Other German automakers, including Daimler and BMW, also fell on the Volkswagen news, as well as concerns about slowing demand for luxury cars in China.

In the financials sector, shares of HSBC declined sharply amid investor worries about its heavy exposure to China. The British bank derives roughly 70% of its earnings from Asia. Banks with major business operations in emerging markets, including Spain’s Banco Santander and the U.K.’s Standard Chartered, experienced some of the biggest declines. European financial stocks fell 8% in aggregate. Industrial stocks also slipped 8% amid growing fears about slowing global economic growth and a potential hard landing in China. Shares of German industrial giant Siemens fell 12%.

Defensive stocks and government bonds held up better, including large utilities and consumer staples companies. Shares of food giant Nestlé rose amid higher-than-expected sales growth in the first half of the year. National Grid, the world’s largest utility company, rallied as investors sought the relative safety of dividend-paying stocks. In bond markets, European sovereign debt advanced on expectations of additional monetary stimulus from the ECB. The yield on Germany’s benchmark 10-year note declined 21 basis points to finish the month at 0.59%.

Asia-Pacific

Japan was among the worst-performing developed stock markets.The MSCI Japan Index shed 14%, hurt by concerns about slowing economic growth in China, one of Japan’s largest trading partners. Pessimism about the state of Japan’s economy also weighed on shares. The yen rose 2% against the U.S. dollar. Overall, the MSCI Pacific Index fell 13%.

In Japan, the materials sector had the worst returns as worries about China’s growth drove commodity prices down, hitting stocks of firms such as Nippon Steel. Plunging commodity prices also hurt trading houses such as Mitsubishi and Itochu, which declined 26% and 21%, respectively. The utilities sector was the best performer, shedding 3%, as cheaper fuel prices boosted the earnings of power generators. Tokyo Electric Power, the nation’s largest utility, rose 19%.

All automakers lost ground amid reports of slowing car sales in China. Toyota, Honda and Nissan declined 14%, 10% and 13%, respectively. Toyota shares slipped in August after explosions in the port city of Tianjin forced the firm to temporarily shutter the company’s largest production facility in China amid safety concerns. Elsewhere in the consumer discretionary sector, shares of Sony declined 16% as investors reacted negatively to the company’s plans for its first share sale in 26 years. Meanwhile, doubts about Panasonic’s ability to meet its full-year guidance figures sent its share price down 28%. Concerns about slowing smartphone sales in China hurt electronics components maker Murata, which declined 28%. China also weighed on the shares of factory automation company Fanuc.

Mobile carrier and Internet provider SoftBank shed 24%. The firm’s equity investments in U.S. subsidiary Sprint, Chinese e-commerce firm Alibaba and Yahoo Japan all declined in value. In addition, SoftBank and rival Japanese wireless carriers NTT DoCoMo and KDDI fell after Prime Minister Shinzo Abe ordered a government minister to study ways to lower mobile phone bills for domestic consumers. Elsewhere, large Japanese banks were weighed down by concerns about the impact of declining equity markets on their extensive stock holdings. In contrast, convenience store operator Seven & I gained 4% after forecasting a record operating profit for the current fiscal year.

Weak economic data sparked fresh doubts about Abe’s drive to boost growth and inflation. Gross domestic product in the second quarter contracted by an annualized 1.2% from the previous quarter, hurt by declining business investment and weak private consumption. In August, industrial production fell and export growth slowed for the second consecutive month. Meanwhile, inflation ran well below the central bank’s 2% target, which it hopes to reach next year. Excluding energy and fresh food, prices rose 0.8% in August.

The MSCI Australia Index fell 7% as lower oil and metals prices hurt energy and materials stocks. Mining giant BHP Billiton slumped 15%. The company took a $2.8 billion write-down on its U.S. shale gas assets. Origin Energy shed 47% after it cut its dividend, announced a share sale and reported a loss for the fiscal year. Elsewhere, shares of the “big four” Australian banks declined on fears that stricter capital requirements would dampen future shareholder returns. Economic data was bleak, eliciting talk of a possible recession. Second-quarter GDP grew just 0.2%, hampered by lower exports. Consumer confidence fell in September and business confidence slipped in August.

Hong Kong stocks declined, caught up in the rout of mainland-listed stocks. The MSCI Hong Kong Index sank 16%, also hurt by weak economic data in China. Exchange operator Hong Kong Exchanges & Clearing fell 34% due to disappointing earnings and fears that the Chinese equity market decline would depress trading volumes. Meanwhile, insurer AIA lost 21% amid concerns about its exposure to weakening Southeast Asian currencies and a slowing Chinese economy.

Emerging Markets

Emerging markets equities declined sharply amid concerns over slowing growth in China, weak commodity prices and uncertainty over the timing of a U.S. interest rate increase. The MSCI Emerging Markets IMI plummeted 18% as all sectors experienced double-digit losses. Investor uneasiness also weighed on emerging markets currencies and debt. Several currencies hit multiyear lows against the U.S. dollar following an unexpected devaluation of the renminbi in August. Local currency debt, as measured by the J.P. Morgan GBI-EM Global Diversified index, fell 11% in U.S. dollar terms.

The MSCI China IMI declined 23%. In August, Chinese monetary authorities devalued the currency, sparking fears that a perceived slowdown in China’s growth was worse than anticipated. The central bank responded to the ensuing market volatility by cutting interest rates for the fifth time since last November and lowering the bank reserve requirement ratio. Profits at Chinese industrial companies fell 8.8% in August from a year ago, adding to fears of deteriorating economic conditions in the country. Shares of raw material producers and energy companies fell significantly.

China’s weakness weighed on other markets in Asia. Indonesia’s stock market declined 25% as growth fell to its slowest pace in six years, and its currency touched its lowest point since 1998. Malaysia shares declined amid a widening political scandal and a tumbling currency that has weakened to a 17-year low. Elsewhere in Asia, equities in Taiwan and South Korea each declined by double digits. India’s stock market was more resilient than that of most emerging markets countries, as the government’s economic reforms have been viewed positively over the past year. However, the MSCI India IMI still declined 6%.

Brazilian equities lost 34%, hurt by declining commodity prices, slowing growth in China and the corruption scandal involving state-run energy giant Petrobras. Brazil’s economy fell into recession in the second quarter, and the deteriorating fiscal and economic outlook led Standard & Poor’s to cut the country’s credit rating to below investment grade for the first time since 2008. The Brazilian real fell 22%, retreating to its lowest level ever against the dollar. Other Latin American countries also struggled. The MSCI Colombia IMI shed 24%, while the Colombian peso also retreated to an all-time low in the face of weak commodity prices.

Russia’s economy shrank 4.6% in the second quarter from a year ago, deepening its recession. Russia’s central bank cut its key interest rate for the fifth time this year, trying to stimulate the sluggish economy without increasing an inflation rate that has held above 15% in recent months. Nonetheless the country remains one of the few emerging markets with a positive year-to-date return, rebounding from a disastrous 2014. Turkish equities slumped as the country’s economic and political woes mounted. Inconclusive general elections in June and mounting militant violence raised fears of a broader conflict. Despite gains in September, the MSCI Greece IMI has declined more than 40% this year, the steepest decline of any emerging markets country.

In debt issuance, Zambia sold $1.25 billion in eurobonds to help fund infrastructure development. Meanwhile, Saudi Arabia sold $5.3 billion of bonds as falling oil prices and high public spending weighed on its finances. Brazilian oil company Petrobras announced plans to raise over $830 million from the sale of local bonds to fund investments and extend its debt maturity. Latvia raised €500 million from a sale of 10-year bonds to cover its state budget deficit and other financing needs. Elsewhere, Hong Kong–based conglomerate Swire Pacific issued $500 million of 10-year bonds, and Korea Development Bank’s 10-year bond sale raised $750 million.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice. 

Terms and Definitions
A market capitalization-weighted index based on the results of approximately 500 widely held common stocks.
Bloomberg Barclays Global Aggregate Index represents the global investment-grade fixed-income markets.
Dow Jones Industrial Average is a price-weighted average of 30 actively traded industrial and service-oriented blue chip stocks.
MSCI Australia Index is a free float- adjusted market capitalization- weighted index that is designed to measure the equity market performance of Australia.
MSCI China IMI is a free float-adjusted market capitalization- weighted index that is designed to measure the equity market results of China.
MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization weighted index that is designed to measure developed equity market results, excluding the United States and Canada. Results reflect dividends net of withholding taxes.
MSCI Emerging Markets Investable Markets Index measures large, mid and small-cap segments, covering approximately 99% of the free float-adjusted market capitalization of more than 20 emerging equity markets.
MSCI Europe Index is a free float-adjusted market capitalization-weighted index that is designed to measure results of more than 10 developed equity markets in Europe.
MSCI Hong Kong Index is a free float-adjusted market capitalization- weighted index that is designed to measure the equity market results of Hong Kong.
MSCI India IMI is a free float- adjusted market capitalization- weighted index that is designed to track the equity market performance of Indian securities listed on the National Stock Exchange and the Bombay Stock Exchange.
MSCI Japan Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of Japan.
MSCI Pacific ex Japan Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of the developed markets in the Pacific region, excluding Japan.
MSCI Pacific Index is a free float-adjusted market capitalization- weighted index that is designed to measure the equity market results across 5 Developed Markets countries in the Pacific region.
MSCI United Kingdom Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of the United Kingdom.
MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure results of more than 20 developed equity markets. Results reflect dividends net of withholding taxes.
NASDAQ is a broad-based index that measures all NASDAQ domestic- and international-based common stock listed on the NASDAQ stock market and is calculated using a market-capitalization-weighted methodology.
Represents the U.S. investment-grade fixed-rate bond market.
The J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified is a uniquely weighted emerging market debt benchmark that tracks total returns for U.S. dollar-denominated bonds issued by emerging market sovereign and quasi-sovereign entities. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.
The J.P. Morgan Government Bond Index – Emerging Markets (GBI-EM) Global Diversified covers the universe of regularly traded, liquid fixed-rate, domestic currency emerging market government bonds to which international investors can gain exposure. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.