Pictet | Frankfurt, 26.11.2015.
We believe equities will deliver healthy gains in 2016 thanks to moderate economic growth and additional monetary stimulus.
Japan and Europe remain our favoured stock markets; both regions benefit from monetary stimulus and improving economic growth.
Emerging markets, undervalued and unloved, could stage a strong recovery. EM stocks are trading at lowly valuations that look increasingly difficult to justify. Within emerging markets, we expect Asian stocks to deliver thestrongest returns – they trade at a notable discount to their Latin American counterparts. Korean stocks look particularly attractive as the economy would be among the first to benefit from any improvement in world trade.
Should the West lift the economic sanctions it has imposed on Russia, Russian stocks may also see a strong recovery.
European government bonds should lag their US counterparts while high-yield and some emerging market bonds could see a strong 2016.
Our research shows that the yield differential between Bunds and Treasuries is heavily influenced by the gap in the nominal growth of the US and euro zone economies, with a lag of about 12 months. With that growth gap now almost closed, we believe that the yield gap between German and US government bonds will also narrow over 2016 – even if monetary policies diverge.
This is not the only consensus trade that will unwind next year. The US dollar’s appreciation looks set to give way to depreciation over the next 12 months. A weaker US dollar also tends to be associated with an increase in investor appetite for risk.
It would not be difficult to convince investors that 2016 might be another tough year. Emerging markets are spluttering, China’s economy is decelerating sharply and the US Fed looks likely to raise interest rates in December. Plus, US equities are close to record highs…
The case for lowering exposure to riskier asset classes looks appealing, but while paying attention to investment risks is usually a shrewd move, adopting an overly cautious stance can be rash. Indeed, it is when the investment climate seems unusually harsh that investors should spend more time focusing on what could go right.
In surveying the financial landscape for 2016, our thinking is increasingly guided by the global economy’s capacity to deliver pleasant surprises. And in our view, there are sufficient grounds for optimism.
One bright spot is consumption. There is growing evidence that consumers will increase spending in 2016. US unemployment continues to fall while wages are rising. Spending should also get a boost from a strong housing market. None of this should be reversed by an interest rate hike. The same trend is in evidence in the euro zone.
China might also give us reason to be a bit more optimistic next year. To facilitate the country’s transition to a more balanced, consumption-oriented economy, policymakers are sure to provide more fiscal and monetary stimulus.
The combination of moderate global economic growth and stimulative monetary policy should prove to be beneficial for riskier asset classes, especially those whose valuations are below the historic average.”
Luca Paolini also points to specific risks to this scenario:
A rate shock caused by a policy mistake – in the form of, for example, overly-aggressive monetary tightening from the Fed – triggers a market crash that tips the economy into recession. In our view, this is unlikely as we believe the Fed will err on the side of caution, preferring to let inflation build rather than stem the recovery.
A credit shock from the build-up of foreign currency corporate debt in emerging markets becoming unmanageable due to a continued rise in the US dollar, triggering a credit bust.
A growth spurt because consumption growth proves stronger than expected and M&A picks up further, delivering a “breakout” in world growth and leading to a build-up in inflationary pressures currency corporate debt in emerging markets becomes unmanageable due to a continued rise in the US dollar, triggering a credit bust.
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