Thank you for your interest in our 2016 Global Outlook. This should cover economic, geopolitical, and market topics in a more in-depth manner that what we would normally post in a newsletter, but we want to keep it interesting enough that we will get to the point without going overly verbose. I hope it is worthwhile reading.
Anyhow, here are some thoughts regarding where we have been and where we think we are headed in 2016…
2015 Highlights and Lowlights:
2015 was certainly difficult for investors as few, if any, asset classes produced significantly positive returns. Equities, Bonds, Emerging Markets, Energy, Commodities, Alternatives and Real Estate all struggled during the year, as fears of slowing growth in China, combined with OPEC flooding the market with oil and the Fed deciding to finally normalize interest rates, all created headwinds. Some of these events will have short lived impact on the markets and US economy, while others may take some time to work their way out.
Looking to 2016:
Economy and Federal Reserve
We still think the US economy is in recovery, as GDP, employment, and housing data are trending positive. With this in mind, the Federal Reserve should have no problem continuing its course of raising rates over the next few years to what would be considered a normalized rate environment. Note that since the economy is not to be considered robust, the Fed will move at a gradual pace, possibly with several pauses along its path.
Coming off a forgettable 2015, the US Equity market should face fits and starts over 2016. There will be opportunities, but generally, one should expect very modest returns over the year. Although the economy is in recovery, we still feel that equity markets may face headwinds from external forces, like emerging markets, commodities, etc. Nevertheless, stocks that are fundamentally sound with good earnings and dividend prospects should provide relatively stable, positive returns for investors. Extra diligence will be required while investing outside this space.
Stocks in the EU are still stuck in an economy that is lagging behind that of the United States. The ECB still finds plenty of reasons to continue its accommodative policies. Nevertheless, European stocks have always put an emphasis on maintaining solid dividends. With this in mind, US investors can potentially benefit by utilizing currency hedged investment products.
With the Fed now in a tightening posture, we feel that bonds, bond funds, and bond ETFs will become more attractive over 2016. The caveat will be that we need to be attentive to duration (interest rate sensitivity) as well as credit risk. As rates increase, high yield products will see the highest pricing risk, as there will be pressure on these credits to yield more. Also, 20-30 year bonds of higher credit quality should underperform as they tend to be more interest rate sensitive. As mentioned before in this outlook, the pace of the Fed will be gradual, and that should allow many investment grade, intermediate term fixed income portfolios to perform well, as they will have time to adjust to Fed moves. And finally, preferred stocks, which behave like perpetual bonds, may be acceptable as long as the Fed moves slowly, as is expected.
With respect to China, I keep hearing – and agreeing with – the concept that the economy is struggling as it matures from a manufacturing focused economy to one that is more consumer oriented. It is fair to say that the US had faced similar issues in the 70’s and 80’s as it began to look for cheaper products from overseas. Expect to see continued economic and market volatility from this country. We will remain vigilant in assessing any sustained contagion risk for our clients. Looking at the rest of the emerging market space (Brazil, India, etc.), we think that although there is a lot of obvious downside risk (recession, inflation, political risk), there are still opportunities for growth in countries that effectively manage their respective economic situations.
At this point, it is difficult to be positive on the outlook for commodities, given the slowdown in manufacturing countries like China. There may be weather related plays available, but those will be trading opportunities, not well suited for the long term investor. Commodities typically are inversely correlated to equities and bonds, and therefore may provide further diversification for a given portfolio. We remain cognizant of this and will implement commodity strategies as appropriate.
I find this a very interesting asset class. OPEC decided to remove any production limits in order to drive prices down and force shale producers to the sidelines. Dominated by the Saudis, there are also reports that they are doing this to keep Iran from enjoying the fruits of a lifted trade embargo. As far as our clients are concerned, we are looking for a bottom in oil prices. At the time of this writing, WTI Crude is in the mid $30/Barrel range. There are opportunities here, but we do need to be patient. We wont be able to time the market but we do keep this asset class on the radar. We will also be monitoring complementary stocks, like airlines, which are quite sensitive to shifts in oil prices.
Domestic real estate valuations should continue to be relatively stable over 2016, given that the economy is doing the same, and bank lending standards have been stringent enough as to limit leverage to speculators. We have been witnessing some investment products take pricing hits in recent months as fears of rising rates have put downward pressure on valuations. These products tend to be interest rate sensitive and may be best watched from the sideline until the volatility calms down.
It appears that many alternative investment strategies have seen better days. Hedge fund returns have not generated returns worthy of the illiquidity and fees associated with them. But there are some areas we are looking at, such as peer to peer lending, which provide solid returns, diversification, and insulation from market noise. We are currently exploring this as an option for our clients, and are keeping an eye out for similar opportunities for our investors.
When you click on our website’s homepage, you see a headline that says “Lots of Rough Water Ahead.” That pretty much says what we have in front of us this year. 2016 will not be an easy year, but with a good, well thought out strategy, we can plot a course to navigate a path for our clients with a positive outcome.
We hope 2016 brings good results for all our clients.