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Predictions for 2016

After a bumpy ride in 2015, we look ahead for some potential opportunities in the coming year
December 18, 2015

To call 2015 eventful probably underplays it a bit. The FTSE reached an all-time closing high of 7103, oil tried to stage a comeback but continued to falter, the Chinese stock market rose 54 per cent by June only to plummet 43 per cent by mid-August and the Greeks added a pinch of drama to the ongoing travails of the eurozone.

It was also a blockbuster year for merger and acquisition activity and debt-raising as companies sought to lock in the enduring historic low rates on offer. According to Dealogic, global deals reached $4.6 trillion (£3.08 trillion) by the start of December - just shy of the record hit in 2007 as a whole. Interestingly, 40 per cent of them are worth $10bn or more, with Anheuser-Busch InBev's $117bn bid for rival SABMiller (SAB) and Pfizer's $160bn tie-up with Allergan heading the bunch.

Corporate debt raising (excluding banks) also passed the $2 trillion mark for the fourth year running and is nearing the record $2.27 trillion raised in the whole of last year, Dealogic data shows.

So what could possibly be in store for 2016? Here are a selection of views from a range of investors.

 

Hermes Investment Management

A blanket emerging markets crisis seems unlikely, the group's chief economist, Neil Williams, says. This is largely because comparisons with 1994 - the Asian crisis - are just not there. External debt ratios are lower, there are fewer fixed currency pegs to protect, and individual countries can print money. In spite of this, Mr Williams says the baton of global growth will be handed back to advanced economies to fuel world growth. He says the gap between advanced and emerging economies' growth rates - at just 2 per cent year on year - is the smallest since the dot-com boom of 2000. Elsewhere, while China has the policy levers to engage in a soft landing, if it missteps or chooses not to act, the US tightening cycle could be "one of the shortest yet."

 

BNY Mellon Investment Management

The Greek situation is likely to rear its head again as the bailout conditions eventually agreed on by the country's politicians and eurozone policymakers require more austerity and spending cuts. Another nation that is likely to remain under the spotlight will be Brazil, whose currency has depreciated by 50 per cent against the dollar in the past three years. Mexico, which has its monetary policy in sync with the US, is likely to do better in 2016.

A key call from the group is being made by James Harries, head of the Newton Global Income strategy. Mr Harries said he is "actively allocating capital" to the US, which he accepted some might find "controversial" given it is the most expensive market at the index level. "But we are still finding individual stock ideas that have been unfairly punished or are out of favour for a range of reasons and which we feel have the business strategy in place to recover".

The manager also said if economic activity falls further then debt defaults were "likely to pick up". He said this may mean "liquidity becomes a key question rather than the solvency of banks, as was the case in 2008".

 

Legal & General Investment Management

Global earnings growth ground to a halt in 2015 but the flat aggregate number hides the fact energy sector earnings fell by more than half while the rest of the market continued to grow at a rate not dissimilar to the past few years, the group's chief economist Tim Drayson said.

Looking ahead, Mr Drayson expects US earnings to grow in the mid-single-digit region and European earnings by a little over 10 per cent. The eurozone and Japan should benefit from similar economic growth tailwinds but without the headwinds of high margins, significant wage pressures or a strengthening currency. The UK is the "earnings wild card" although, he added, with growth depending greatly on whether commodity prices recover or not.

 

Invesco Perpetual

The group's chief investment officer Nick Mustoe says confidence in the prospects for global economic growth have been "shaken" in the wake of the rebalancing of the Chinese economy.

"I anticipate a low-growth environment for most economies to continue as we go into 2016," he said.

Mr Mustoe said growth in developed economies was "reasonable" but "disappointing by historic standards" while the outlook for emerging markets and Latin America in particular remains "most challenging". The situation could be made even worse for oil-exporting countries as Mr Mustoe expects the glut of oil supply coupled with falling demand is likely to mean "prices could well continue falling into 2016".

He is most upbeat about European equities thanks to improved eurozone competitiveness and a banking system that is able to "play a constructive role in the economy once again".

"The combined impact of structural reforms and a low oil price could provide a powerful cocktail for modestly improved economic growth and strengthening company returns," he added.

State Street Global Advisers

The world's second-largest asset manager chimes with many of those above. It expects there to be an acceleration in growth in emerging markets but does accept the risks "are to the downside" reflecting uncertainty about China, the potential negative impacts from a US rate rise and slowing world trade.

The house also proposed sticking with US equities on expectations earnings growth there should turn positive again in 2016 and cited the consumer discretionary, housing and banking sectors as those likely to benefit from a rising rate cycle. There was also confidence about the prospects from Europe, given ongoing easing by the European Central Bank, a weak euro and low energy prices.

The overriding message, though, comes from the group's chief economist, Christopher Probyn: "Investors must plan accordingly to manage their assets effectively in this low and slow environment."

 

Broader view

Bonds

The differential between US and European bond yields will move higher, according to Axa Investment Managers' fixed-income CIO Chris Iggo. He added that, given the European Central Bank is trying to stoke inflation and the US is hoping to maintain the recent increase in inflation there, exposure to inflation-linked bonds "looks attractive". Insight Investment fund manager David Hooker also said inflation is a "cheap asset class" and that 30-year inflation-linked Treasuries were "guaranteed to beat inflation between now and 2045".

Strategists at banks including Goldman Sachs, JPMorgan, Morgan Stanley, UBS, Royal Bank of Canada, Societe Generale and BNP Paribas have all recommended that investors stock up on inflation-proofed government debt in the coming year, too.

Fidelity bond manager Ian Spreadbury thinks the low-growth, low-inflation environment will remain and that investment grade corporates are "attractively valued". But he expects default rates to pick up given the amount corporate leverage has risen in the low-rate environment.

 

Commodities

China's borrowing binge alongside slower income growth has left many households and companies over-indebted and thus wanting to repair their balance sheets, according to Dieter Wermuth, head of macroeconomic research at Wermuth Asset Management. This means the country is likely to spend less and this implies demand for commodities "will not recover quickly". China accounts for 11 per cent of world oil demand and for 40-70 per cent of the demand for other key commodities. Mr Wermuth said commodities are under pressure from "weaker demand and excess capacities" and that the most likely event to propel prices upwards would be a technical reaction "given that everybody seems to be short".

 

Macroeconomics

While there are several things for investors to be mindful of - emerging markets weakness, China, US rate rises and record high levels of US equities - Pictet's chief strategist Luca Paolini says there are "sufficient grounds for optimism".

One bright spot, he claims, is consumption. "There is growing evidence consumers will increase spending in 2016," he says. He thinks spending can get a boost from the strong housing market. He adds China is likely to provide "more fiscal and monetary stimulus" as it seeks to rebalance its economy. Monetary stimulus around the world and moderate global economic growth "should prove beneficial for riskier asset classes".