Market Outlook 2016
In this section we look at the House view of one of the leading Fund Managers operating in Ireland and importantly, what’s their current view on the markets.
January 2016
| Government bonds | ||
|---|---|---|
| US Treasuries | Continued economic growth, especially tighter labour markets and rising wages, should enable the Federal Reserve to raise interest rates further throughout the year. | VERY LIGHT |
| European Bonds | An environment of low inflation, modest economic growth, further QE and more negative official rates support European bonds. Political pressures may affect peripheral bond markets on occasion. | HEAVY |
| UK Gilts | Domestic economic strength should give the Bank of England leeway to raise rates in the aftermath of the US. Inflation pressures remain manageable. | LIGHT |
| Japanese Bonds | The Bank of Japan’s sizeable bond-buying programme has driven valuations into expensive territory, as authorities continue to try to reflate the economy. | NEUTRAL |
| Global Inflation-Linked Debt | While inflationary conditions are globally subdued, markets may react to a rise in headline inflation as the impact of previous commodity price weakness becomes less marked over time. | NEUTRAL |
| Global Emerging Market Debt | Dollar-denominated bonds are Heavy as spreads show better value, while local currency bonds are Neutral as careful examination is required of individual currency and spread factors. | HEAVY/NEUTRAL |
| Corporate bonds | ||
|---|---|---|
| Investment Grade Debt | Our preference is to be higher up the corporate capital structure. Widening US credit spreads create an attractive opportunity over low-yielding Treasuries; improving cash flows benefit euro debt. | HEAVY |
| High Yield Debt | Recent sell-offs have improved valuations modestly, but overcrowding remains a risk in the US market when monetary policy is tightened; European debt remains supported by yield-seeking investors. | NEUTRAL |
| Equities | ||
|---|---|---|
| US Equities | Valuations are expensive on some metrics and margins likely to compress with higher wages and stiffer import competition. However, stock buybacks and dividend payouts are still supportive. | NEUTRAL |
| European Equities | Corporate competitiveness is improving, and earnings should receive a lift from further euro depreciation, an improvement in domestic demand and lower energy costs. | HEAVY |
| Japanese Equities | Earnings upgrades from a weaker yen, improving corporate governance, lower corporate taxes and the central bank’s QQE programme support the asset class. Abenomics’ structural reform components must be implemented. | NEUTRAL |
| UK Equities | The domestic economic backdrop is supportive but certain companies have large exposure to overseas earnings, which are under pressure from stronger sterling and commodity price pressures. | NEUTRAL |
| Developed Asian Equities | Trade flows are increasingly a headwind, with a strong Australian dollar affecting its terms of trade. China’s economic slowdown is harming commodity producers. | NEUTRAL |
| Emerging Market Equities | There are pockets of deterioration within emerging markets, with the commodity price slump badly affecting Brazil, political uncertainty in Eastern Europe and large behavioural shifts affecting the Chinese market. | NEUTRAL |
| Real estate | ||
|---|---|---|
| UK | The robust growth environment continues to bolster prices in the near term and yields remain attractive compared to other assets, suggesting reasonable returns over a three-year holding period. | HEAVY |
| European | Core markets continue to offer attractive relative value in light of the low interest rate environment supported by QE, while recovery plays are showing consistent capital value growth. | NEUTRAL |
| North American | Canadian property faces headwinds from significant office construction and consumers that are sensitive to interest rates. The US should benefit from continued economic growth but pricing is quite aggressive. | NEUTRAL |
| Asia Pacific | An attractive yield margin remains but markets are divergent. Returns are driven by rental and capital value growth in Japan, but limited to capital growth in Australia, Hong Kong and China. Emerging Asia markets are risky. | NEUTRAL |
| Other assets | ||
|---|---|---|
| Foreign Exchange | The US dollar has already sizeably appreciated despite upcoming rate rises; QE in Japan and Europe will keep currencies there under pressure. Sterling is supported by an eventual UK interest rate rise. | NEUTRAL $, €, £, ¥ |
| Global Commodities | Different drivers, such as US dollar appreciation, Chinese demand, Middle East tensions and climatic conditions, influence the outlook for different commodities. | NEUTRAL |
| Cash | ||
|---|---|---|
| The US and some emerging markets have started to raise interest rates, while the UK waits for the opportune moment. In Europe and Japan, policy should remain easy. | NEUTRAL | |
Key Issues
Divergences in the global economy are becoming more apparent. The main area of weakness is across emerging markets, especially China, which is suffering from poor investment decisions in the past. Conversely, the backdrop for developed economies generally remains upbeat, helped by positive drivers for consumer spending and business services. Falls in oil prices are leading to income and wealth gains and losses for different countries.
While we expect as much financial market volatility in 2016 as in 2015, we remain positive on the outlook for selected stock markets. Within equities, we favour Europe, as the economy is improving and corporate earnings should benefit from currency depreciation. Meanwhile, we are Neutral on Japan, the UK, US, developed Asian equities and emerging markets; the latter generally underperform during periods of US dollar strength and commodity price weakness.
Within fixed income, we continue to look for yield opportunities. We have increased our positions in corporate bonds, although selective purchases are required given balance sheet risks. Expensive valuations mean we are Light in most government bond markets. The exception is a Heavy position in European bonds, which benefit from low inflation and continued ECB QE. Meanwhile, we remain Heavy in real estate, where valuations encourage a rotation towards cheaper markets in order to take advantage of an attractive combination of growth prospects and yield.
| Warning: These funds may be affected by changes in currency exchange rates. |
| Warning: Past performance is not a reliable guide to future performance. |
| Warning: The value of your investment may go down as well as up. |
| Warning: If you invest in these funds you may lose some or all the money you invest. |
| Warning: A deferral period may apply to withdrawals and/or switches from certain funds. Please refer to your product documentation for further details. |