At our investment committee meeting in late January, we asked portfolio managers at three leading investment firms, Edmond de Rothschild, Russell Investments and Aberdeen Asset Managers, for their views on the investment environment and the year ahead.
It has been a dramatic start to the year for investment markets. We saw sharp falls, with markets retreating mainly due to two factors: China and oil prices.
At our last investment committee meeting in late January, we asked portfolio managers at three leading investment firms, Edmond de Rothschild, Russell Investments and Aberdeen Asset Managers, for their views on the investment environment and the year ahead.
Has their outlook for 2016 changed since the start of the year?
Edmond de Rothschild remains positive for the global growth outlook in 2016. There is a strong labour market in the US which is supporting consumer confidence, and very good leading indicators in Europe. It does not believe that China will have a hard landing. The country is undergoing structural reform and the supply has to be more responsive to consumers. The problems with China recently have been largely because of its communication, rather than its execution. In Japan positive reforms are taking place.
The recent market events have not made Russell Investments change its 2016 outlook. It does not believe a US recession is likely this year. Underlying US economic fundamentals remain solid and it views the recent sell-off as a temporary correction. It expects a continuation of moderate global growth this year, with equities modestly outperforming fixed income. It favours Europe and, to a lesser degree, Japan. With the recent weakness in markets, its view on the attractiveness of US equities has improved.
Aberdeen Asset Management’s view remains “lower for longer” on growth, interest rates and inflation. It will remain cautious on markets until it sees world growth improving. However, when sentiment in the market is so low, there could easily be a strong bounce. Although volatility will remain, for long-term investors markets look cheap on recent trading. This correction should not be a surprise after the long equity rally, and it brings value back to the markets.
What Impact will low oil prices have on markets in 2016?
Russell explains that the impact of the low oil price will vary. Economies dependent on being oil producers will have lower revenues, which will negatively impact national gross domestic product, whereas consumers of oil will benefit from lower input prices. On balance Russell expects this to be a net positive for global growth, accounting for the subsequent volatility and tensions stemming from budget deficits and political tensions.
Edmond de Rothschild points out that although a lower oil price is usually a tailwind for economic growth since input costs are lower, the negative short term impact on the capital expenditure of oil companies; energy producer countries and deflationary pressure has brought instability in financial markets and discredit on monetary measures taken by central banks. However, long term, a lower oil price will support lower-income households as they adapt their spending accordingly.
Where will growth come from in 2016?
Edmond de Rothschild sees a lot of value in European equities and high yield bonds. The European economy is supported by robust leading indicators, accommodative monetary policy, a weak currency, weak oil price, and earnings estimates which could surprise on the upside.
Russell anticipates markets will function under the backdrop of elevated volatility in 2016 and expects modest growth in equity markets. The recent selloff makes US equities attractive from a valuation perspective. Exposure to European equities could provide the greatest investment opportunities due to their spare capacity and reasonable valuations, which make this asset class attractive.
Aberdeen Asset Management sees growth coming from the developed markets as emerging markets remain under pressure due to commodity markets. It anticipates US growth at 2%, UK at 2.25% and Europe at 2% for 2016.
Are they concerned about a particular asset class or region?
Edmond de Rothschild is cautious on US high yield bonds, and emerging debt in local currencies is absent from their portfolio until they see some stabilisation in the currency and commodity markets. Russell remains concerned about emerging markets and commodity prices. Aberdeen sees emerging markets remaining soft if the oil price remains low, and also sees US politics as a risk for 2016.
While no-one can say with certainty what will happen next, volatility is normal in all market cycles and pullbacks and corrections regularly happen. If you are invested for the long-term, your portfolio should smooth out temporary market volatility.
Volatility creates opportunities. Share prices have fallen and if you have money to invest this can be a good time to buy, as you could potentially buy more shares; shares that will rise in price once the current uncertainty is over. However you need to be prepared for further short-term volatility and to hold your investments for the longer term.
Strategic asset allocation and diversification are key. Your portfolio needs to be created and managed to meet your particular circumstances, aims and risk profile. Ensure your investment portfolio is appropriately positioned and diversified to minimise risk, and to take advantage of the investment opportunities presenting themselves.
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These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon and attitude to risk of the investor.
All advice received from any Blevins Franks firm is personalised and provided in writing. This document should not be construed as providing any personalised taxation and/or investment advice. You should not make investment decisions based on the views noted here as they relate to the investment views of each investment team at a given point and can change over time.
The value of investments can fall as well as rise as can the income arising from them. Past performance should not be seen as an indication of future performance.