Download 2015 Into 2016: The Saga Continues…

2015 Into 2016: The Saga Continues…
Contributors:
Rajesh Ramroop, Yuri Seedial, Kris Sookdeo, Trevis Gangaya, Ravi Kurjah
First Citizens Research & Analytics
The year 2015 proved to be a challenge as both developed and emerging markets continued to falter, energy prices
fell to lows not seen since 1998 and the powerhouse China began to show signs of economic slowdown. In the midst
of all the volatility, the U.S maintained a steady economic trajectory concluding with the Federal Reserve (Fed)
raising rates in December after seven years zero interest rates. It was a vastly different scenario for other nations as
the fall in commodity and energy prices had negative repercussions throughout their economies.
United States (US)
June 29
The Standard & Poor’s 500 Index fell the most since April 2014 and erased its gain for 2015, while European shares
capped their worst day this year on concern Greece will exit the euro. Treasuries advanced with the yen and gold as
investors sought safe-haven assets.
August 12
The Standard & Poor’s 500 Index reversed a 1.5% decline as investors turned to U.S. shares after China’s shock
currency devaluation spurred a global equity selloff. Gold rallied while the dollar retreated.
August 20
American stocks failed to add to their second-biggest advance of the year, as early gains following a rally in Asia
faded amid jobs data that bolstered the case for higher U.S. interest rates. Losses worsened in late trading on the day
as Apple Inc. slumped after unveiling new products.
September 09
The rout in emerging-market assets knocked the Standard & Poor’s 500 Index out of its seven-month trading range
and sent U.S. equities down the most in 18 months amid mounting concern that global economic growth is faltering.
October 30
More than 250,000 energy jobs globally disappeared as a collapse in oil and natural gas prices continued to ravage
the industry. Nearly half the lost jobs came out of oil-field-services businesses that help energy producers pump oil
and gas from the ground. The fallout hit localities like Odessa, a West Texas city in one of the most prolific U.S.
drilling regions. Odessa’s unemployment rate rose to 4.7% in October, from 3% a year earlier. The pain also hurt
steel-pipe makers in Illinois, stores in North Dakota selling gear to roughnecks and home sales in Houston.
December 16
The Federal Reserve raised interest rates for the first time in almost a decade but at the same time signaling that the
pace of subsequent increase will be “gradual” and in line with previous projections. The Federal Open Market
Committee (FOMC) unanimously voted to set the new target range for the federal funds rate at 0.25% to 0.5%, up
from 0% to 0.25%. Policy makers separately forecasted an appropriate rate of 1.375% at the end of 2016.
December 30
During the year the much examined unemployment rate fell to 5% from 5.6%. The workforce expanded by 2.6
million employees and average hourly earnings of private-sector workers rose 2.3%—not especially robust growth
in historical terms, but the steepest of the past six years.
U.S. shale drillers proved more resilient to the price drops than many expected. Simultaneously, a bloc of countries
led by Saudi Arabia resisted cutting their crude production to stem a global glut. The price of U.S. crude plunged in
2015 from a high of around USD61 a barrel to as low as USD35. Exxon Mobil Corp, the largest U.S. energy
company, reported its profit fell by almost by half to USD13.4 billion during the year’s first nine months. But the
energy industry’s curse is a bonus for consumers. American drivers can now fill up for less than USD2 a gallon in
many regions.
Europe
March
Early 2015 saw the European Central Bank (ECB) beginning its bond buying program, some six years after the U.S.
embarked on its Quantitative Easing (QE). Fed-style QE in Europe has overcome both practical and political
challenges. This move was met with some resistance from its German counterparts at first but the ECB was able to
overcome this. An initial asset-purchase program worth 1.1 trillion euros was introduced as a means of curbing
deflation risk. The stimulus sent the euro tumbling to its lowest level against the dollar in a decade and pushed yields
on some government bonds into negative territory.
July/August
The union of the Eurozone in 2015 experienced some tense standoffs as Greece proved to be a “problem-child”.
Elected on an apparently contradictory agenda of both rejecting further austerity and remaining in the euro, Alexis
Tsipras’ led government went to the wire and then capitulated, agreeing a further austerity program that was, in
some respects, worse than the one originally rejected.
September
Volkswagen AG lost almost a quarter of its market value after it admitted to cheating on U.S. air pollution tests for
years (approx. 11 million vehicles).
China
March 15
China’s Q1GDP rose 7.0%, the slowest since the global recession in 2009, adding to speculation that stimulus will
follow.
August 11
China suddenly devalued the Yuan by 2% and roiled global markets. The People's Bank of China (PBOC) shifted
policies on how it manages the yuan by allowing markets to play a bigger role in valuing the currency. It now sets
the yuan's daily fixing to the U.S. dollar based on the currency's closing level the previous day. Before the change,
the PBOC was not overly influenced by daily market moves, and sometimes pushed the currency in the opposite
direction.
Brazil
August 11
Moody's Investors Service downgraded Brazil's foreign currency long term credit rating to Baa3 from Baa2. The
rating agency also changed the outlook on the rating to stable from negative. According to the ratings agency, the
downgrade was driven by: weaker than expected economic performance, lack of political consensus and
deterioration of government debt and debt affordability.
September 9
Standard & Poor’s downgraded its foreign currency, long term credit rating on Brazil from BBB- to BB+. The rating
outlook remained negative. This revision means that Brazil has lost its investment grade status. The downgrade was
driven by what S&P saw as a weakening of Brazil’s fiscal and credit profile stemming from uncertainty in the
political environment. Following the Petrobras scandal, there have been signs of dissent within President Rousseff's
cabinet and growing calls for impeachment. This lack of support has the potential to derail efforts to contain Brazil’s
fiscal slippage.
December 16
Fitch Ratings lowered its long-term foreign currency rating on Brazil from BBB- to BB+. According to Fitch, the
downgrade was triggered by three factors: The economy's recession is deeper than previously anticipated, continued
adverse fiscal developments and increased political uncertainty that could further undermine the government's
capacity to effectively implement fiscal measures to stabilize the growing debt burden.
December 18
The country’s fiscal position had been deteriorating as a result of spending and lower tax revenues. The aggressive
stance of former Minister of Finance Joaquim Levy had been seen as a positive in this regard and initially a primary
surplus of 1.1% was target for 2015. However, the government soon backslid on this target and, faced with
significant resistance from both within and outside of the party, Levy resigned in December. The move has raised
significant concerns about the Brazilian government’s ability to improve its fiscal standing.
Cuba
July 20
Restoration of diplomatic relations between Cuba and U.S as previously agreed to by US President Barack Obama
and Cuban President Raul Castro.
August 14
The US secretary of state, John Kerry, inaugurated the US embassy in Cuba with the American flag flying for the
first time in 54 years.
September 18
The White House eased travel, commerce and investment restrictions on Cuba. The new rules enable American
companies to open locations and hire workers in Cuba, facilitate financial transactions between the two nations and
also removed limits on the amount of money that could be sent to Cuba. They allow American telecommunications
and Internet companies to locate in Cuba and market their services there, as well as to import mobile applications
made in Cuba for development in the United States. Cruise ships will now be able to travel between the United
States and Cuba without making a stop in a third nation while Americans can now have bank accounts in Cuba and
Cubans can maintain bank accounts outside of their country.
Dominica
August 26
Dominica was hit by Tropical Storm Erika resulting in a high level of infrastructural damage and some loss of life as
well. The World Bank and Government of Dominica estimated total damage and loss at USD483 million (96% of
GDP).
Jamaica
September 29
Standard and Poor’s Rating Services (S&P) affirmed its ‘B’ long-term and short-term foreign and local currency
sovereign credit ratings on Jamaica. Additionally, the outlook on the country’s long-term sovereign credit remains
stable. S&P has also affirmed the ‘B+’ rating on Jamaica’s transfer and convertibility risk.
December 16
The Executive Board of the International Monetary Fund (IMF) on December 16 completed the tenth review of
Jamaica’s economic performance and enabled an immediate purchase of an amount equivalent to SDR 28.32 million
(about USD39.3 million). The Extended Fund Facility (EFF) arrangement was approved on May 1, 2013. Jamaica’s
performance under the agreement with the IMF has been strong as most of the requirements have been surpassed.
However, overall growth remains weak and unemployment, though declining, remains high. Continued structural
reforms should help boost investment and growth by sustainably reducing energy costs, improving financial access,
and upgrading public infrastructure.
Trinidad & Tobago
April 30
Moody’s Investors Service downgraded Trinidad and Tobago's government bond rating and issuer rating to Baa2
from Baa1 and changed the outlook to negative from stable citing persistent fiscal deficits and challenging prospects
for fiscal reforms, the decline in oil prices and limited economic diversification to weigh negatively on economic
growth prospects and a weak macroeconomic policy framework given lack of a medium-term fiscal strategy; and
inadequate provision of vital macroeconomic data.
September 7
General elections were held in T&T, which saw the emergence of the then opposition, The People’s National
Movement, forming the newly elected Government of Trinidad and Tobago. Dr. The Honorable Keith Christopher
Rowley was sworn in as the nation’s eighth Prime Minister while The Honorable Faris Al-Rawi, was appointed as
the country’s Attorney General and the cabinet’s lead council.
October 5
The new government revealed its fiscal plan for the new fiscal year: “Restoring Confidence and Rebuilding Trust:
Let’s Do This Together” . The budget is based on an oil price of USD45 per barrel and a mix of gas prices to reflect
our markets, including Henry Hub of USD2.75 per mmbtu and Indonesia of USD8.00 per mmbtu. GDP growth is
expected to range between 1% - 1.4% per year, and the modest expectations are based on the uncertain outlook for
the energy sector and increasing public sector financing constraints. The budget forecasts a deficit of 1.7% of GDP
in FY 2016 and a significant decline in energy revenue. The non-energy revenue is expected to be boosted by
taxation measures, including:







Initiate reform of VAT (reduced from 15% to 12.5%, tax base widened)
Enhance tax collection and compliance
Reform the fuel subsidy ( 15% increase in diesel and super gasoline)
Increase business Levy (increased from 0.2% per quarter to 0.6%)
Increase Green Fund Levy (increased from 0.1% per quarter to 0.3%)
Phase in Property Tax Regime (revert to existing Property Tax Act 2009)
Introduce a tax regime for the gaming industry
October 29
Acting on special directives from the Minister of Finance, The Central Bank reverted to its foreign exchange
distribution system that existed as at March 2014. In making the announcement, the Bank announced plans to inject
USD500 million into the system to clear the backlog of demand for foreign currency. As at end October 2015, net
official reserves stood at USD9.64 billion, 13% lower compared to October 2014.
November 30
Falling energy exports slowed conversions of US dollars by energy companies, the main source of inflows to the
domestic foreign exchange market. In the eleven months to November 2015, conversions from the energy sector
stood at around USD3 billion, 25% lower than in 2013.
December 7
On December 7 2015 approximately 600 workers of the Point Lisas steel manufacturing company ArcelorMittal
were laid off. Failure to agree with the workers’ union on several issues and the over-supply of steel on the market
coupled with the slowdown in new orders resulted in the shutting down of the plant.
December 23
The Central Bank of Trinidad and Tobago announced the appointment of Dr. Alvin Hilaire as Governor and
Chairman of the Board of the Central Bank of Trinidad and Tobago (CBTT) with effect from December 23, 2015.
Dr. Hilaire had been appointed by the President for a term of five years and replaced Jwala Rambarran as the
Governor of CBTT.
December 24
Standard & Poor’s revised its rating outlook on T&T from stable to negative. T&T’s long term credit rating from
S&P of “A” remained unchanged. The negative rating outlook reflected a one-in-three chance of a rating downgrade
in the next two years. The change reflected the ratings agency’s expectations of prolonged low energy prices and
potentially poor GDP growth prospects that could result in a steadily rising debt burden.
December 29
Address to the nation by Prime Minister Keith Rowley highlighting forthcoming tough economic conditions and
proposed measures such as:
1)
2)
3)
4)
7% cut in expenditure of all Government ministries.
Restoration of Land & Building taxes from January 2016.
Revised VAT regime.
Boost housing construction through private sector partnerships and merger of TTMF and the Home
Mortgage Bank.
5) Separation of the Heritage and Stabilization Fund into two funds, and use approximately USD1.0 billion for
stabilization purposes in FY 2016 and a further USD0.5 billion in FY 2017.
What’s In Store for 2016?
US
United States (U.S) stocks are projected to record single-digit gains next year, a modest forecast by recent standards.
According to average targets the S&P 500 will end 2016 at 2,196.40. The outlook faces significant risks, including
rising U.S. interest rates, the strengthening U.S. dollar and tame global growth. Moreover, some major concerns for
investors are slower growth in China, Middle East turmoil and terror attacks. Yet many strategists expect some U.S.
growth-oriented stocks, including the financial sector to outperform even though the sector is down 2.06% year-todate. Financial sector earnings could benefit from the Fed increasing rates, which will generally generate wider
spread income and go directly to the bottom line. The economy will be supported by healthy expansion of consumer
spending but business investment growth remains relatively subdued. However, the modest pace of GDP growth
should be more than enough to effect ongoing tightening of the U.S. labor market. With labor productivity growth
and labor force growth both running at depressed rates, GDP’s average forecast is stagnant at 2.3%.
S&P 2016 year‐end target
2,300
UBS, 2275
2,250
Reuters Poll, 2207
Average, 2196.4
2,200
Barclays, 2200
2,150
Goldman Sachs, 2100
2,100
2,050
Bank of America, 2200
Year ‐on ‐ year growth based on 2016 average targets = 5.22%
Current Index Level, 2087.36
2,000
Current Index
Level
Goldman
Sachs
UBS
Barclays
Reuters Poll
Bank of
America
Average
US Presidential Elections
While it's still a long way to the general election in November 2016, the debate season is well underway and the first
primary elections are less than three months away. On the Democratic side, the momentum for left-wing senator
Bernie Sanders seems to have receded somewhat, and Hilary Clinton appears to be the favorite. For the
Republicans, Jeb Bush's campaign has sputtered and Marco Rubio, the Florida senator, has become the dark horse.
However, he trails Donald Trump and Ben Carson in the polls and will also have to fend off conservative Ted Cruz,
a senator from Texas, to win the nomination.
Policy Views Comparison Table
Democrat
Republican
Economic Ideas
Minimum wages and progressive
taxation i.e. higher taxes for
higher income brackets
Generally opposed to raising taxes.
Same tax rate regardless of income.
Wages should be set by the free
market.
Government intervention
Government regulations are
needed to protect consumers
Government regulations hinder free
market capitalism and job growth.
Healthcare Policy
Support universal healthcare;
strong support of government
involvement in healthcare,
Private companies can provide
healthcare services more efficiently
than government-run programs.
Stance on Immigration
There is greater overall support in
the Democratic party for a
moratorium on deporting - or
offering a pathway to citizenship
to - certain undocumented
immigrants
Republicans are generally against
amnesty for any undocumented
immigrants. Republicans also fund
stronger enforcement actions at the
border.
Europe
From Eurozone’s flagging economy and potential deflationary spiral, to the Greek debt crisis, the region has been
faced with a number of challenges. While there has been some encouraging fiscal news in Europe during the last
year, it is expected that the ECB will increase its quantitative easing measures, including potentially adding
corporate bonds to its asset purchasing program. The ECB’s Head Draghi sought early in 2015 to exercise ECB’s
powers by forthrightly responding with a series of bold measures, including the negative interest rate of -0.1% to
boost Eurozone, and the unveiling of 60 billion euros a month asset purchases of mainly government bonds. Another
topical issue within Europe is UK’s position on a potential referendum on European Union (EU) membership next
year, which could generate significant market volatility, continues to challenge investors.
China
This past year presented a challenge for China in sustaining growth in its economy, affecting its industrial
production and its demand for commodities. This resultant impact saw an abrupt slide in demand has helped to push
some major commodity producing nations, such as Brazil, into a recession. China’s government has also attempted
to shift its economic model from less dependence on investment and external demand to more centralize around
domestic consumption. Growth is expected to remain steady, averaging roughly 6% as at the end of 2015. The
weakening GDP growth also continues to raise doubts about the leadership's political will to remain resolute in its
commitment to reconfigure the nation's economy from one reliant on exports to a model driven by domestic
demand.
Trinidad and Tobago
For 2016, the CBTT forecasts a further 1.50% decline in real GDP on the premise that the alleviation of the natural
gas supply constraint and low energy prices are not expected to improve during the year. Production from the BP
Juniper field is expected to come on stream in 2017. Inflation expectations for 2016 come in at much higher than
current figures due to the widening of the tax base announced in the Budget 2015/ 2016. Even at the lowered VAT
rate of 12.5%, if the base is increased the upward push on price would cause core inflation to go to 3.5% while food
inflation would reach double digits. Headline inflation will also increase to approximately 5%.
Central Bank's short term 2016 outlook is for:
•
•
•
•
A continued contraction of the Trinidad and Tobago economy, on the back of a further decline in the
energy sector, which will compound sluggishness of the non-energy sector;
For the country's external position to come under more pressure;
Central Government's fiscal deficit to increase from what was budgeted; and
Public debt to rise as a result of more government borrowing to finance projects (which has been recently
indicated by the Government going to Parliament to seek approval for the increase in borrowing limits by
TTD15 billion).
Jamaica
A gradual economic recovery is underway in Jamaica, with growth projected at about 1.5% in FY2015/16, and 2.5%
for the next fiscal year. According to Bloomberg, the Jamaican Stock Exchange had a better year when compared to
any of its counterparts across the globe. Amid the moderate returns of the world’s best known indices; foreign
acquisitions, stronger investor safeguards and a rebounding economy helped the Jamaica Stock Exchange surge
more than 90% in 2015. New measures recently introduced, by the Jamaican Government, in order to combat insider
trading and market manipulation, would serve to further develop investor confidence, especially if investment
inflows are desired. Further opportunities for investors may be on the cards for 2016 as Finance Minister Peter
Phillips has said that government positions in the Petroleum Corp. of Jamaica and power generation and electricity
distribution companies are candidates for divestiture.
Brazil
Brazil’s economy took a real beating during 2015 with three consecutive quarters of substantial contractions (2.02%, -3.00% and -4.45% in Q1, Q2 and Q3 respectively). The economy has been slowing as domestic
consumption and local and international commodity demand collapses. Chronic high inflation has led to successive
interest rate hikes which further stymies consumption and investment. In addition to the impact of slowing domestic
consumption and commodity demand, Brazil’s economy also had to contend with the impact of a massive corruption
scandal at state owned Petrobras which came to a head in 2015.
Looking forward, the December 24 survey by the central bank suggests that there will be consecutive contractions of
3.70% in 2015 and 2.81% in 2016. Fiscal consolidation will weigh on growth - an increase in taxes on fuel, imports
and personal loans. Additionally, the Petrobras scandal has the potential to severely affect economic activity as it is
a major contractor in the country and the company's capital investment program is likely to be delayed or curtailed.
Political uncertainty may also curb new investment.
Energy
Key Risks to Energy Forecasts
Industry
Energy
Downside
Upside
Persistent crude oil over supply (by mainly OPEC,
Russia and USA) and new projects starts (mainly
from Africa, Canada and UK).
Stronger than expected demand-side response to
lowered oil prices.
Emerging Markets (EM) Growth Crisis (Mainly
China and Brazil).
Capex cutbacks causing deeper than expected
production decline rates.
Stronger than expected Iranian oil exports.
Sharp decline in US Shale production.
Return of Libyan supplies to market.
Source: BMI, EIA
In giving our opinion and being mindful not to get into the complexities of energy pricing, the Research team at First
Citizens Investments Services is of the view that crude oil prices may see a minimal increase for 2016. Additionally
we see Natural Gas faring somewhat better that of crude and should register a more notable uptick in 2016, as a
result of laws passed in large emerging markets (China and India) to utilize cleaner fuels. Bloomberg forecasts that
Henry Hub Natural Gas prices will end 2016 at USD2.75 per mmbtu and WTI crude oil at USD40.67 per barrel.
El Niño
Meteorologists are forecasting the strongest El Niño weather cycle on record. El Niño is a naturally occurring
weather phenomenon where the warm waters of the central Pacific expand eastwards towards North and South
America. Rainfall reduction between 20-30% can be expected which causes havoc to food supplies in countries such
as Indonesia, Brazil, India and Africa while Latin America and the Caribbean is subjected to both drought and
erratic rainfall. The adverse effect on the agricultural sector of many of these developing world nations may
eventually filter into developed nations resulting in increased food prices. Scientists have stated that historically
food prices have gone up by 5%-10% for staples with crops like coffee and rice and cocoa and sugar being
particularly affected in periods of El Niño.
Commodities
Despite expectations of one of the strongest spells of El Niño in recent times, a spike in global agricultural prices
given sufficient supplies of agricultural produce is unlikely. However, El Niño can be a source of adverse weather
patterns that could have a greater impact on more isolated local food markets specifically in the Southern
Hemisphere.
The role that China plays in the movement of commodity prices continues to be influential as the future of metal
prices has become heavily reliant on China’s demand. Among industrial commodities, iron ore prices have tumbled
40% this year due to global oversupply and shrinking Chinese steel demand for a third year of losses, and the
collapse is seen stretching to next year. Moreover, copper demand in China, which accounts for over 45% of world
copper consumption, has been affected by soft export demand for electronics, a weak construction market and slow
progress on implementing investment in infrastructure. Copper prices are hovering around its worst levels since
2009. Currently, given some weak showing in Chinese indicators namely industrial production and manufacturing
index, there are no convincing signs of higher prices in 2016.
Rise of the Eagle?
Much is left to be seen in 2016: will we witness the rise of an underdog or will we witness the rise of the phoenix or
in this case the eagle as the US seems poised to become the driving force of the world. Will the rest of the world be
left behind or will they successfully respond to the challenges that 2016 may bring?
DISCLAIMER
This report has been prepared by First Citizens Investment Services Limited, a subsidiary of First Citizens Bank
Limited. It is provided for informational purposes only and without any obligation, whether contractual or
otherwise. All information contained herein has been obtained from sources that First Citizens Investment
Services believes to be accurate and reliable. All opinions and estimates constitute the author’s judgment as at
the date of the report. First Citizens Investment Services does not warrant the accuracy, timeliness, completeness
of the information given or the assessments made. Opinions expressed may change without notice. This report
does not constitute an offer or solicitation to buy or sell any securities discussed herein. The securities discussed
in this report may not be suitable to all investors, therefore Investors wishing to purchase any of the securities
mentioned should consult an investment adviser.