Conor Carey • 26 Jan 2016

Investment Outlook January 2016

As ECB President Draghi intimated that further stimulus was likely on the way, we believe the time is right to begin cautiously putting money back into equity markets. Volatility in 2016 will provide investment opportunities.

Equity markets are fairly valued on a historical basis and are an attractive investment versus cash and bonds. The US interest rate hiking cycle will continue and volatility in financial markets may increase. This will provide opportunities for investors. Global growth should continue to improve.

Global growth should continue to improve

  • Expectations are that global growth will accelerate into 2016 (3.4% versus 3.0% in 2015), underpinned by accommodative monetary policy
  • The cyclical recovery in the Eurozone should continue. Structural reforms could help the long term potential growth rate
  • China to continue on a path to growth slowdown as economic policies rebalance GDP demand from fixed asset investment to service-led growth
  • Inflation expectations remain subdued; previous oil price falls should continue to underpin consumer spending

Eurozone bond yields are at extreme lows. US rates are finally moving higher            

  • Bonds, particularly in the Eurozone and Japan, do not offer much upside returns
  • ECB rates are negative – short term yields will remain low for several years
  • Fed interest rate hiking cycle to continue – a welcome normalisiation of policy
  • UK rates are likely to rise in the second half of 2016

Equities still the most attractive asset class on relative valuation grounds

  • Equity markets are fairly valued on a historical basis and attractively valued versus cash and bonds
  • Consensus expectations are for 7.5% earnings growth in 2016. Similar total returns for equities seem possible
  • Equity market volatility may pick up in 2016 on policy divergence, geopolitical tensions, re-occurring growth concerns, foreign exchange and commodity moves
  • Eurozone recovery is still ongoing, with ECB delivering further support. In Japan improving corporate profitability and corporate governance should underpin the market
  • Stabilisation of emerging market growth and commodity price needed to improve sentiment toward the sector
  • US multiple expansion is less likely. We are close to historically high margins and face into further Fed rate increases.

US Dollar strength to continue. Commodity prices will remain under pressure

  • US Dollar strength will persist in 2016 but in a less dramatic fashion versus the Euro
  • The Chinese Yuan will continue to weaken versus US dollar in 2016
  • British pound to come under pressure ahead of a likely vote in Q3 2016, on British exit from the European Union
  • Commodity prices to continue lower in general. In the medium term we are more positive on the oil price

 

Upside risks to outlook:

  • Global growth accelerates, buoyed by low input prices
  • The global liquidity wave from central banks will increase further in 2016 which is supportive to asset prices
  • Commodity prices stabilise, allaying deflationary concerns and improving the outlook for global Capital Expenditure

 

Downside risks to the outlook:

  • Political risks increase
  • Commodities, particularly oil, continue to fall resurfacing deflationary fears
  • Markets losing belief in the effectiveness of Central Banks’ monetary policy
  • US growth and inflation pick-up more quickly, forcing the Fed into stronger rate hikes

Conor Carey

Headford
Contact Conor

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