Outlook 2016 - Multi-Asset
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.
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