Outlook 2016: Multi-Asset
After years of liquidity-driven markets, investment trends look tired and we expect muted returns in 2016. Cyclical assets present the main source of potential ‘pent up returns’ and could be a wild card for investors.
23 December 2015
Many 2015 themes remain in place
Looking into 2016, we thought about ‘cutting and pasting’ from our 2015 outlook when we said:
- The US continues to lead the recovery but growth momentum elsewhere is weak. As such, we favour assets that can cope with subdued levels of growth.
- Equities performance is likely to remain narrow; we prefer those areas of the market where corporate earnings trends are most well-established.
- The outlook appears tough for commodities although there could be opportunities after recent steep price falls.
Certainly economic data would suggest more of the same; measures of manufacturing activity remain subdued and global GDP growth remains stuck around 2.5% with the US being the main bright spot. We remain focused on developed economy growth and have avoided cyclical assets.
This has been the right call but the challenge we now face is that quantitative easing has inflated the prices of the assets we have liked and the trends look tired. Accordingly we have reduced the risk in our portfolios compared to previous years.
Economically-sensitive assets have fallen in value
What would enable us to refresh our portfolios and position for stronger returns? Certainly assets exposed to the more cyclical areas have fallen significantly in value; emerging market equities are down 15%, commodities are down 26%, US energy stocks are down 24% and local emerging market debt has fallen by 15% this year (Schroders, DataStream, 31 Dec 2014 to 22 Dec 2015).
This could be a potential source of ‘pent up returns’ and we see two potential catalysts:
Firstly – the economic ‘pie’ may grow more quickly than is currently expected. Here we would expect surprises to come from US and European consumption given the fall in the oil price.
Secondly, the economic ‘pie’ may be sliced differently depending on currency movements. In recent years, the Europeans and the Japanese have been the winners of the currency wars. With the Federal Reserve now starting to raise rates it looks like this trend could continue as higher US rates could support further strength in the US dollar.
However, we do see a scenario where the US dollar could weaken, particularly if European inflation picks up and the Japanese choose to desist from further quantitative easing for political reasons.
In summary, it is too late to add to the beneficiaries of quantitative easing and a bit early to add to the cyclically sensitive assets. Patience is a virtue.
Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.