Investors: Expect the Unexpected in 2016

By Nathan Lee, TLE Correspondent 

Investors have been warned to expect the unexpected in 2016 with several key events on the horizon that could significantly impact the market environment.

The Multi-Asset Research team at Source, who look at the the likelihood of the unexpected happening in 2016, found the economic and market environment for next year should favour equities, particularly in Japan and the Eurozone due to the low interest rate policies being adopted by their central banks. The team’s latest publication also explains why fixed income could disappoint in 2016, with shorter duration US high yield being a possible exception.

Some of the key issues on which the market will focus its attention in 2016 are:

  • Whether China will avoid a hard landing,
  • The pace of interest rate increases by the Federal Reserve and Bank of England, and any signs that the hikes are dampening activity,
  • The possibility of more aggressive easing by the European Central Bank and Bank of Japan,
  • US presidential elections,
  • The UK’s potential exit from the European Union,
  • How the Rio Olympics and commodity prices impact Brazil and other emerging markets.

The team expects the US economy to continue to expand, China to avoid a hard landing, the Eurozone to stabilise and commodity prices to continue adjusting lower.  Within equities, financials and value stocks may be the greatest beneficiaries from this environment, while growth sectors such as consumer staples, healthcare and technology could lag.

Paul Jackson, Head of Multi-Asset Research at Source, commented: “We place a 40 per cent probability in this base case scenario, but we know from the past that events can often develop unexpectedly to alter the future. In fact, that is almost a certainty.  We therefore consider a range of scenarios and assign probabilities to each one occurring.  We believe that, after the base case, the next most likely outcome is ‘benign deflation’ where there is high growth but deflation, due mainly to low commodity prices.  We give this a 25 per cent probability and, interestingly for investors, this should also be positive for equities.”

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