2016 - Market Outlook

 

I hope this latest Market Outlook finds you well as we are looking forward to moving in to 2016 with optimism and hope you find this an interesting and informative read.

 

We have unfortunately seen disappointing global economic performance for the close of 2015 and in fact last year was the worst year for investment markets in seven years!

Most asset classes experienced annualised drops and even equity markets that did experience positive annual returns, ended substantially down from their all-time highs set in May.

This year has started off badly primarily being driven by drops in the Chinese stock market. However, while markets are currently volatile there are reasons to be optimistic about the year ahead.

Low Crude Prices

Low oil prices from last year, have yet to fully filter into the real economy. However this will happen across the next 6 months. Some analysis suggest this could see a $2 trillion stimulus for the world economy. Much of this boost will be in the places that need it most, particularly in emerging markets like China.

Unemployment

Unemployment in the US and the UK is at multi-year lows and close to pre-crisis levels. However, this is being done at record low inflation levels. It’s unlikely for such economies to be knocked off a growth trajectory when fundamentals are so strong. It’s also highly unlikely that the world economy will enter recession with the US and UK growing.

Europe

A mix of fiscal and monetary stimulus as well as the positive shock of low oil prices is returning the Eurozone to growth. While Europe still has many problems to solve it seems for the time being that the economic crisis in the Eurozone is over.

Opportunities

Perhaps the best reason for optimism in 2016 is asset valuations. Unlike last year where we began with high asset values we are entering 2016 with low values in many markets. The Chinese Market is off by 32% from its high last year. The FTSE 100 is down by 14% and the S&P 500 is down by 7%. Other markets such as commodities have seen prices drop by more than half across 2015. When markets have a bad year as they did in 2015, they tend to be followed by a good year. Much of the reason for these lower valuations is due to markets pricing in a Fed tightening cycle, with rates rising by around 1% per annum for the next three years. However, this assumes a return to normal levels of inflation. With commodity prices so low it’s hard to see a return to rampant inflation and it may end up that the Federal Reserve does not raise interest rates by as much as it has outlined. Indeed the Fed has constantly over estimated inflation since 2009. If rates rise by less than anticipated the markets will react positively.

Caution

While there is room for optimism in 2016 there are still a number of reason to be cautious. Prime among these concerns, is China. It was hoped that the positive data coming out of China towards then end of last year suggested that the Chinese Recession of 2015 was over. However recent data suggest that that may not be the case. It may take Beijing longer to turn things around than was previously hoped. In addition, rising tension between Iran and Saudi Arabia may cause problems moving forward.

Strategy for 2016

Our strategy in 2016 will be very much to continue holding the assets that we have. We expect to see energy and oil in particular move higher across the year. We will continue to hold main market equities; however, we may look for some limited opportunities in emerging markets later in the year. We will stay out of the bond markets for the foreseeable future and we remain negative on gold with a price level being above $1,000.

It’s our expectation that as we are coming into the year on a low, that it will not be necessary to sell down any equity holdings in the summer but this will depend on how well equity markets do in the run up to May.

For more interesting articles, please visit our CEO's blog: www.stuartyeomans.com

Previous Article Next Article

 

 

 

 

 

Share