Monday, 11 January 2016

The investment “bright spots” in 2016

Regions, sectors and policies are more divergent than ever, how has this altered the investment landscape as we head into 2016.

The investing ‘”bright spots” globally are likely to remain in developed markets as we head into the New Year.  The consumer sector will remain the biggest driver of markets in 2016, but investors should still expect returns to remain fairly muted.

Since commodity prices began collapsing at the start of the year, consumers across commodity and oil-importing countries have enjoyed lower prices and as such have had greater incentives to spend more.

For many economies, we’re only running on one engine – consumers – but if you’re only going to have one engine then consumption is the right one to pick. I do think in all these key developed regions, at least in EU and US, there are drivers for this consumption growth.

If you look at the UK for example, there is a sweet spot we currently have where productivity, having fallen so far short in this recovery, is finally starting to pick up, but it is nowhere near where it should be if we continue the normal trend since 2008.

But it is improving and that has an interesting effect on the Bank of England because, if you look at wage growth, even compared to the US you’re seeing a lot more nominal and real wage growth in the UK then you are in the US and you’ve certainly seen more acceleration in wage growth over the last year as the economy has ticked up.

While economic improvements would usually lead to central banks raising interest rates there are several reasons why the Bank of England has not done so yet.

One of which is the exchange rate compared to the US dollar. A further reason for the lack of rate rises is that there is extra spending capacity as a result of rising economic productivity. For a large part of 2015 you can see how the unemployment rate continuing to fall has helped to boost consumer confidence.

The eurozone is showing similar traits at the moment, following the disappointment felt across markets earlier this month when Draghi announced that the ECB would extend but not expand its quantitative easing programme. While markets slumped following the news, the chief market strategist argues that expectations had simply become too high and that, if investors expect to be positively surprised, they probably won’t be.

Lending in the Eurozone region is picking up slowly, although she’d like to see an improvement on the corporate side as most of this comes from households, but there has still been an improvement in conditions nevertheless. The real concern Europe have is for the long term inflation picture, that’s why they acted, but there is a decent recovery in Europe and this is a recovery like the US and the UK which is driven by consumption.

While our outlook is overall positive, there is a multi-layered divergence in terms of policy, region and sector, and that attractive areas of the market remain in developed markets and close to consumers. I think the basic conclusion is that large parts of the world, differentiated and diverged as it is, are still doing well enough to support risk assets, but I think in a very moderate and a much more low-key way than perhaps we saw over the last few years. You should certainly keep your expectations under control as we don’t necessarily see the same kind of upside that we’ve seen in recent years. A focus on higher quality is imperative going into 2016. 

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