Investment Themes for 2016
Sluggish global growth
Despite recurrent forecasts that “next year the economy will rebound,” a gradual slowdown has been apparent since 2011. Emerging markets are slowed down by China and low commodity prices. Lower productivity growth in advanced economies, plus the U.S. approaching a cyclical peak
Monetary policy divergence
Fed parts ways with everyone else, even if slowly. Modest tightening by the Fed, coupled with easing by ECB, BoJ, PBoC, and no change by BoE. EM central banks constrained by currency depreciation, capital outflows, inflation, and lower-than-normal growth
Risk on/Risk off Trades
Markets de-risking on the back of the above (slowing growth, China wobbles) US pessimism
China
There is no evidence of an imminent collapse. In fact, economic data point to a modest rebound, within the long-term structural slowdown . Renminbi: Down, down, down
Market Volatility
Higher risk of recession, as evidenced by declining or slowing profits. Higher uncertainty: consequences of monetary policy de-synchronization; China’s policy-makers response to market turmoil.
Herd mentality can amplify the effect of higher perceived risk and uncertainty.
Portfolio Views
Remain tactically cautious – underweight domestic equities, overweight global equities
Understand drivers of returns . Marry value with the cycle Expect more short term volatility
Remain underweight cyclical/resource counters
Managers slowly starting to increase exposure but too early to be fully exposed.
Continue to favour overweight offshore exposure in portfolios and defensive quality businesses.
Focus on earnings.
Increased allocation to cash and neutral allocation to listed property
As rate hiking cycle begins, cash likely to offer better value than bonds.
Beware short term currency effects
Remain fully invested offshore but beware short term currency fluctuations.