Reviews. Commentaries. Opinions.

Q4 2015 Review

Q4 2015 Review

In early December, I had the pleasure of attending a Wealth Management conference in Zurich with some of Europe’s largest asset and wealth managers. There were many interesting discussions for both professional and end-client as we all had one thing on our minds – how to make money in 2016?! There are plenty of issues to keep us concerned and cautious as we actively seek opportunities. It is interesting to see how the entire industry grapples with similar issues of low returns, high levels of uncertainty and volatile markets – I have elaborated more on this issue below.

The Big Picture

The first thing I did when I started writing this year's review was to check what we said about 2015 in December 2014. We were right in some asset classes, however, like many, under-estimated how European equities will be positively affected by the EU monetary policy expansion. In Q3 2014 we wrote that the Dollar is the new Gold hitting it right that the USD would strengthen. Although most of our predictions came true, we never claimed to have a crystal ball and to be able to tell the future. That is why we use the investment approach that we do: a robust, committee-supported (including non-executives), strategic asset allocation approach. This protects us for when the crystal ball fails. 2015 was a difficult year for returns. Not only did the main asset classes not produce interesting returns, but also there were some pretty scary moments along the way and I can remember quite a few conversations with concerned clients. The volatility of 2015 proved we were correct in minimizing our tactical tilts on riskier assets.

December 16th saw the first upward move in interest rates from the Fed in nearly 10 years. The move was highly anticipated and expected. Overall this is good news for the economy as we crawl back to post-crises normality. The Fed re-affirmed their commitment to an inflation target of 2% by 2018 and the equity market responded positively. Speculation and uncertainty exists with respect to the pace of further increases in the next 12 months. Market expectations seem to indicate 1 or 2 further increases in 2016, however the Fed "dot plot" indicates at least 4 increases (each dot is one committee members view).Janet Yelin emphasized several times the strategy of a gradual increase. The numbers did not fully justify an increase at this time, however she explained that, on a balance of risks, they would rather move now than wait and have to move the rates up too quickly. This means to me that the probability of a reduction of rates back to zero is not insignificant either. Either way, I believe that our model duration at around 3.9 is the right level and we will not be changing anything as a result of this announcement. I personally will be surprised to see 4 increases next year but we will see continued interest rate volatility.

Geopolitical Risk

Following the Paris attacks, growing military involvement of the west in Syria, global refugee problem, etc. we can euphemistically say that we have an unusually high level of conflict zones around the world, which makes us wonder:

  • How does one factor this into an investment portfolio?
  • How could these events affect global economies?
  • Are they systemic risks?
  • Will this effect risk sentiment and therefore riskier assets?
  • Will there be an ISIS 9/11?

The investment approach we take is that we must be aware of these risks and their potential; however, we cannot quantify them or model them into our portfolios. Therefore, the answer is to focus on the base case. This base case assumes that the political instability is just noise and will not affect the long-term value being created by global economies. My fear is that the world appears to be on a slippery slope to something, and that during 2016 we will suddenly have to move from a base case model to an “emergency reaction model”, which could mean a sudden de-risking of the portfolio even at the pain of suffering short terms loses. Let us hope we don’t have to.

Climate Change and Your portfolio

December saw the first climate change agreement after twenty years of negotiations. This is an enormously complex story and one needs a large dose of faith in humanity and politicians to believe that it does not have pitfalls. The details here are important. The emission capping targets are self-determined by nations and the goals that have been set are for year 2100 – 85 years' time. The short-term impact to the investment thesis is therefore not clear. Large sums of money have been made available for technological development and therefore this space will be interesting. My trust in the UN is so low that I am somewhat skeptical that this is in the best interests of humanity, but I would love to be positively surprised over the long term.

Time will tell and we therefore mainly feel that from a portfolio standpoint the Climate Change story is mainly noise.

OECD Automatic Exchange of Information

We have covered this topic several times in the past. International investors need to be aware that in the not too distant future more than 100 countries will be sharing information about residents holding offshore assets. The OECD automatic exchange of information makes it possible for countries to automatically provide lists of cross border clients. It is therefore crucial that clients consider all aspects of relevance to their country of residence and where their assets are held so they can take appropriate action where necessary to ensure they do not fall foul of these developments. Not only will the amount be disclosed but also the narrative information concerning the account. With respect to structures, the bank will be looking beyond the beneficial owners at “controlling persons” or “reportable persons”. The process is starting to be implemented in 2016 and is expected to be fully operational by 2018.

Brief Summary of Asset Classes Performance in Q4 2015

  • The US Stock market as measured by the S&P finished 2015 slightly negative.
  • The global stock markets as measured by the MSCI All Country world index finished negative at -2.74% .
  • Markets to have been invested in 2015 were Denmark, Hungary, Italy and Japan.
  • Markets to have avoided were Hong Kong, Taiwan, Australia, Canada, Brazil.

The big theme that affected 2015 markets was the “end of the commodity super cycle” as commodities prices, especially energies and metals, fell to pre-2007 levels surprising the entire mining industry and the commodity producing countries. This appears to be more of a supply side issue than a demand side issue as the mining world builds up excess capacity, anticipating endless demand from China. We have not seen the end of this drama just yet as we expect the energy and commodity space in the high yield bond sector to suffer more pain.

Outlook for 2016

The challenge for 2016 will be to produce acceptable returns from conservative assets. This is not a new challenge; we have been in this environment for several years. However, in 2016 we expect this to be even more apparent.

Opportunities exist in riskier assets e.g. European equities, Japanese equities and emerging market equities. Within the emerging market, we like Mexico and India, and are concerned about Russia and China. Russia is going to be hurt by the low oil price levels and China seems to be finally hitting some real growth challenges.

High yield bonds are concerning, especially portfolios with direct single lines. We would be recommending reducing the single line exposure.

We have spent considerable time discussing and assessing if the concern in the high yield sector will translate to a general sell-off of riskier assets without reaching any clear conclusions, yet we do acknowledge that the risk of contagion is there.

As we always recommend, the rewards will come to the disciplined and the damage will be done to investors who try to move in and out of large positions. Returns in 2016 will not be consistent over the year so if you miss a month you may miss the whole year’s worth of return.

Israel at a glance

Whatever has happened in the Israeli market of significance in Q4 appears to be more because of external factors than internal factors. Inflation is negative (deflation) as a result of the low oil price and the volatility experience was more driven by foreign rate speculation than by Israeli rate speculation. Another reason for the negative inflation is the VAT reduction – these are positive drivers of deflation rather than reduction of consumer demand. However, deflation over the longer term will be a major source of concern for the Bank of Israel. December also saw the closure of the highly dispute and controversial gas deal. This was excessively politicized and many populist and socialist based arguments were made against the deal. The deal is complex and on the balance of issues the market will support the prime minister approach. The government-spending deficit has also decreased despite a very difficult security situation. The Tel Aviv Stock exchange (TA 100) finished 2015 slightly positive at 2.03%. Most of the returns in Shekel managed portfolio would have come from longer term unlinked bonds.


The aforementioned information is not a substitute for personal Investment marketing, which takes into account the particular circumstances and special needs of each person. The views expressed in this Review should be considered as market comment for the short term for information purposes only. As such the views herein may be subject to frequent change, are indicative only and no reliance should be placed thereon. This Review does not constitute legal, tax or accounting advice, or any investment recommendation, or any offer to buy or sell financial instruments of any kind, and does not take into account the investment objectives or needs of specific investors. Although this Review has been produced with all reasonable care, based on sources believed to be reliable, reflecting opinions at the time of its writing and subject to change at any time without prior notice, neither Pioneer Wealth Management nor any other entity or segment within the Pioneer International Group makes any representations or warranties as to the accuracy or completeness hereof and accepts no liability for any loss or damage which may arise from its use. The writer and the company are unaware of any conflict of interest at the time of publishing the above commentary.


About the Author

Mike Ellis

Mike Ellis

Director and Chief Investment Officer

Mike Ellis, originally from South Africa, joined Pioneer in March 2000 after working in the Private Banking & Trust industry in the UK. At Pioneer he was the group CFO for the better part of the last decade. Today Mike serves as a director and is the CIO.

Mike is a Chartered Accountant, a CFA charter holder and received his MBA from Tel Aviv University & Kellogg Business School. Mike is also an Oxford University Alumni having participated in the Said Business School's Global Investment Risk Management Program. In addition, Mike is a licensed Portfolio manager by the Israel Securities Authority.

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Dear Clients,

During these difficult days for all of us, we wanted to update you and reassure you regarding your investments.

Our office remains functioning and we are available to answer any questions you may have at any time. Portfolios are being monitored and managed throughout this period. We will provide more comprehensive updates regarding investment portfolios in the coming days and weeks. 

The Pioneer family wishes a full and speedy recovery to all the wounded.

We send our condolences to the families who have lost their loved ones.

Praying for the safe return of all security forces and civilians and for peaceful days to come.

From the Pioneer Wealth Management Family