Feature: Global equities in 2016

15-Jan-2016

By Kristen Crawford

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A number of events in the closing weeks of 2015 are expected to cast a long shadow over global equities markets in the year ahead.

Insights from several market commentators reveal markets will generally experience growth across the board, but could be relatively volatile as the year progresses.

December’s key meetings of the European Central Bank (ECB), Organisation for Petroleum Exporting Countries (OPEC) oil producers and the United States Federal Reserve will have a lasting impact on the global economy, according to JP Morgan Asset Management strategists.

“The loosening in policy by the ECB [in December] followed by a first Fed rate rise only two weeks later confirmed that monetary policy on both sides of the Atlantic is set on divergent paths,” group chief market strategist for the United Kingdom and Europe Stephanie Flanders says.

More important for investors than the timing of the first US monetary policy tightening will be the pace of subsequent rate rises, her colleague, global market strategist for Australia and New Zealand Kerry Craig, says.

“The strength of US consumption and investment will be important in paving the way for continued gradual, and very abnormal, normalisation of monetary policy,” Craig says.

The US dollar and the oil price will be key pointers to the 2016 economic outlook, which is where the OPEC meeting comes into the equation, he says.

Alliance Bernstein US economist and director of global economic research Joseph Carson says last year’s US rate hike was an endorsement by policymakers of the sustainability of the economic cycle and should boost consumer, business and investor confidence.

“Even with the small change in official rates, monetary policy remains overly accommodative, and we view this continuation as a positive factor for faster economic growth in 2016,” Carson says.

Meanwhile, investment manager Neuberger Berman says global equity markets are in for a relatively volatile period as investors adapt to the Fed's tightening cycle.

“While returning to a more normal rate environment is a long-term positive, this could be exacerbated by events in China or indications that global growth has failed to reach already measured expectations,” Neuberger Berman chief investment officer of equities Joseph Amato says.

“Moreover, geopolitical conflicts could result in periods of heightened market turbulence.”

However, Amato is encouraged by growth in the US and improving economic traction in Europe, and expects modestly positive returns for the global economy in 2016.

“We believe that the US will continue to display reasonable growth given the strength of the consumer and the Fed’s cautious approach to raising rates,” he says.

Vanguard Australia economist Alexis Gray believes the global economy will move towards a more balanced and healthier equilibrium once the debt-deleveraging cycle in the global private sector is complete.

Significantly, Gray says the high-growth 'Goldilocks' era enjoyed by many emerging markets over the past 15 years is over.

“We anticipate sustained fragility for global trade and manufacturing, given China’s ongoing rebalancing and until structural, business-model adjustment occurs across emerging markets,” she says.

“We do not anticipate a Chinese recession in the near term, but China’s investment slowdown represents the greatest downside risk.”

The growth outlook for developed markets, on the other hand, remains modest but steady.

“As a result, the developed economies of the United States and Europe should contribute their highest relative percentage to global growth in nearly two decades,” Gray says.

But with other regions disappointing in the growth stakes, overall global equity returns are not predicted to be stellar.

“Our medium-run outlook for global equities is centred in the range of 7 to 10 per cent,” Gray says.

Vanguard’s long-standing concern over “froth” in certain past high-performing segments of the markets has been tempered by the underperformance of those market segments in 2015 and, as a result, the group does not believe Australian or global stocks are overvalued, she says.

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