It is easy to assume the investment landscape in 2016 will follow the trend of 2015. In spite of divergent approaches, the central banks are likely to remain supportive. Global growth expectations for 2016 are slightly above the 2015 figure, although it will still be modest growth. What has changed, however, are the drivers of growth: developed markets are catching up on emerging markets, consumption and service-driven sectors are outperforming industrials, domestic markets are growing faster than exports. Therefore, "buy and hold" is not an option since markets might depart from fundamentals every now and then. Investors must react dynamically.
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We expect global growth to continue its upward trajectory, though at a slower place. Regionally, US will continue to lead the global growth. Fed lift-off began in December 2015, however, the upwards trajectory to rate normalization will be very slow and unlikely to reach pre-crisis levels.
We are also constructive on Eurozone growth but geo-political headwinds can become an escalating concern. Overall, domestic demand is expected to be a big driver for growth due to a higher employment rate caused by structural reforms. Another central bank in easing mode is Bank of Japan (BoJ). With the growth-inflation picture being less rosy than the government would like, additional easing is on the cards. The only thing more important than monetary stimulus for Japan is progress on structural reforms.
In emerging markets, Chinese growth is being dampened by the necessary supply side and state-owned enterprises (SOE) reforms, and we expect GDP to stabilise around 6% by the end of 2016. The People’s Bank of China (PBoC) will remain in expansionary mode given sluggish growth prospects, overcapacity and leverage.
Regards China FX – though the CNY has been showing signs of stabilizing against the USD, investors continue to be skeptical towards the Chinese Government’s intentions and ability to maintain a stable CNY FX rate. The authorities are increasingly encouraging investors to move away from comparisons with solely the USD but rather compare the CNY to the new trade weighted CFETS RMB basket.
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By GlobalDataGiven investor skepticism, Asian currencies continue to be under pressure. Besides, further tightening in US monetary policy may drive Asian currencies to be even weaker. Furthermore, commodity prices and China-related trade weakness will continue to take its toll on commodity and trade-dependent emerging economies with serious recessions in Russia and Brazil for next year.
With the global macro as a backdrop, equity is still our preferred asset class. Modest earnings growth and the prospects of some dividend yield in a low or negative interest-rate environment keep us modestly constructive on global equities. We maintain a regional preference of DM equities over EM equities. Although, EM equities are currently trading at a significant valuation discount to the S&P 500 Index, we see scope of further consensus earnings downgrades.
Asia ex-Japan remains preferred within an emerging-markets context. In DMs, we see Eurozone and Japanese stocks offer some more profitability catch-up to their U.S. peers. But more than strong regional preference, we recommend to focus on industry and stock selection in 2016.
We favour developed markets and the healthcare, technology, consumption and financial sectors. Consumer discretionary remains one of our favourite sectors. Medium-term drivers such as cheap oil, falling unemployment and rising wages in the advanced economies remain intact. The effects of the emissions scandal on the automotive sector are beginning to fade although the high share of its sales going to emerging markets remains a burden.
Information technology is another of our favourites. IT companies regularly demonstrate their pricing power, particularly in the software segment (e.g. cloud computing, big data, mobile internet). Weaker segments such as hardware are partly supported by M&A activities.
At first sight, the globally-supportive monetary environment also seems little changed. Within the fixed-income sector, US and euro corporate bonds therefore continue to offer opportunities. Within sovereigns we favor the Eurozone periphery. But differences do exist between 2015 and 2016. The marginal effect of further monetary easing should fade.
Furthermore, the market discounts central-bank policy initiatives at the time of their announcement, not of their implementation. Pressure on the Fed to act has also increased. Turbulent financial markets have served to justify its inactivity in 2015, but further passivity would be perceived negatively by most market players. Increasing divergence in monetary policies and short-term rates should lead to a stronger USD versus other major currencies.
In conclusion, markets should rise less in 2016 than they did in 2015. But volatility should increase. New opportunities will emerge for tactical investors.
Sean Taylor is the CIO APAC at Deutsche Asset Management
