Outlook 2016 - Multi-Asset

Multi-Asset

29/12/2015

Many 2015 themes remain in place

Looking into 2016, we thought about ‘cutting and pasting’ from our 2015 outlook when we said:

  • The US continues to lead the recovery but growth momentum elsewhere is weak. As such, we favour assets that can cope with subdued levels of growth.
  • Equities performance is likely to remain narrow; we prefer those areas of the market where corporate earnings trends are most well-established.
  • The outlook appears tough for commodities although there could be opportunities after recent steep price falls.

Certainly economic data would suggest more of the same; measures of manufacturing activity remain subdued and global GDP growth remains stuck around 2.5% with the US being the main bright spot. We remain focused on developed economy growth and have avoided cyclical assets.

This has been the right call but the challenge we now face is that quantitative easing has inflated the prices of the assets we have liked and the trends look tired. Accordingly we have reduced the risk in our portfolios compared to previous years.

Economically-sensitive assets have fallen in value

What would enable us to refresh our portfolios and position for stronger returns? Certainly assets exposed to the more cyclical areas have fallen significantly in value; emerging market equities are down 15%, commodities are down 26%, US energy stocks are down 24% and local emerging market debt has fallen by 15% this year (Schroders, DataStream, 31 Dec 2014 to 22 Dec 2015).

This could be a potential source of ‘pent up returns’ and we see two potential catalysts:

Firstly – the economic ‘pie’ may grow more quickly than is currently expected. Here we would expect surprises to come from US and European consumption given the fall in the oil price.

Secondly, the economic ‘pie’ may be sliced differently depending on currency movements. In recent years, the Europeans and the Japanese have been the winners of the currency wars. With the Federal Reserve now starting to raise rates it looks like this trend could continue as higher US rates could support further strength in the US dollar.

However, we do see a scenario where the US dollar could weaken, particularly if European inflation picks up and the Japanese choose to desist from further quantitative easing for political reasons.

In summary, it is too late to add to the beneficiaries of quantitative easing and a bit early to add to the cyclically sensitive assets. Patience is a virtue.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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