Just a few months into 2016 and the year is living up to the billing that it will prove a very challenging year for investors.
The disappointing performance delivered by European equities in recent years has been to date carried through, despite a rather promising end to 2015. Sadly though, as the year drew to a close so did the rally.
Europe’s decline this year has been broadly based, with all the main markets falling in unison, as did most of the sectors. The downturn was indicative of general profit-taking following a strong rally during the fourth quarter of 2015.
Indeed, the scale of the rebound in October – 7.1% for the MSCI Europe ex UK Index in US dollar terms – ensured that even a weak December could not prevent strong returns for the quarter overall.
It is slightly rosier picture for the sector in relative terms, though.
The average fund in the Morningstar Europe ex UK Large-Cap Equity category significantly outperformed the MSCI Europe ex-UK index in 2015 – delivering a return of 3.3% in US dollar terms while the index struggled to remain above water, losing 0.65% – which follows three successive years of outperformance by the average fund.
There was also a significant difference in terms of returns over the year as a whole when comparing funds by their market-cap focus, with the average fund in the Morningstar Europe ex UK Small/Mid-Cap Equity category returning 10.5%.
Although the fortunes turned this year, funds with a smaller-cap tilt have shown slightly more resilience than their large-cap-biased counterparts when compared with the index.
January’s financial market turbulence turned into a veritable storm in the early days of February with extreme moves and volatility in all asset markets. Crude oil suffered its biggest two day plunge in seven years, bond yields collapsed and financial stocks led substantial falls in European equity markets.
Although this partly reflects increasing investor uncertainty and anxieties over growth, oil and central bank policy, some speculative trades in far less liquid financial markets have amplified the volatility.
Investor concerns were initially driven by a US slowdown, Chinese developments and the implications of further commodity price falls.