Economic and asset allocation views covering Q1 2016. This includes our 2015 review, three strategy questions for 2016 and a research note on the Federal Reserve's (Fed) rate hike.
11 January 2016
Don't blame the Fed
Risk assets started the final quarter of 2015 well with a significant rally in global equities in October; however, by mid-November the move had lost momentum and the markets reversed tack into the end of the year.
The New Year has started in the same vein, with equities losing ground.
It would be easy to blame the increase in Fed funds rate for this move, but the historic decision by the US central bank to add a quarter of a point to rates on December 16th should have been seen as confirmation that the economic recovery was well established and hence a positive for markets.
Instead, it would seem that concerns about global growth and China have returned to the fore.
Uncertainty about the Chinese exchange rate in particular is vexing investors who fear another round of the currency wars.
There will be no rapid resolution to these issues and we expect the Chinese economy will struggle to regain momentum until the authorities tackle the structural issues weighing on growth.
However, as can be seen from our economic views, we do expect the world economy to grow in 2016.
Global recession tail risk
Global monetary policy remains loose even after the Fed move and fiscal policy will also add to demand in the US and Eurozone. Meanwhile the latest fall in commodity prices, although bad news for producers, will give a further fillip to consumer spending.
Global recession is still a tail risk rather than the baseline view.
Nonetheless, the environment remains difficult for investors who must assess the effect of Fed tightening, the China slowdown, potential currency wars and a strong dollar on markets.
In particular the lack of solid corporate profits growth in the US is a challenge to equities which tend to de-rate during Fed tightening cycles.
Along with valuation concerns these cyclical concerns have led us to a more neutral stance on equities, having been positive for much of the past five years.
For more on this and asset allocation, see inside where we also review 2015 and look in more detail at the key questions for the coming year.
Important Information: The views and opinions contained herein are those of Schroders’ Investment team, 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. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us