2016 Investment Themes

2016 has started with many of the same fears/investment themes as seen in 2015. This note provides a summary of key 2016 investment themes on the global economic and investment outlook in simple point form.

  • Global growth of 3% or just above, with the US around 2%, Europe and Japan lagging and China running around 6.5%, but Brazil and Russia still in recession.
  • Scope for a cyclical bounce or at least stabilisation in commodity prices, but in the context of a continuing secular downtrend in response to excess supply.
  • Continuing low inflation on the back of global spare capacity and weak commodity prices, notably oil, the over riding investment theme among them all.
  • Continuing sub-par growth in Australia of around 2.5% for most of the year in response to falling mining investment, the commodity price slump and budget cuts but with the hope of some improvement by year end.
  • Easy monetary conditions with the US very gradually raising rates (two hikes at best, but the risk is one or none), but on going easing in Europe, Japan, China and Australia.
  • A further rise in the $US but at a slower rate than seen over the last two years, with the $A falling to around $US0.60.
  • Modest gains in shares, with global shares outperforming Australian and emerging market shares again.
  • Solid returns from commercial property and infrastructure, but soft gains of around 3% for Australian residential property prices as Sydney and Melbourne slow.
  • Low returns from low yielding cash and bonds.
2016 investment themes

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The key risks for 2016 investment themes

  • The Fed could prove to be too aggressive in raising rates, and even if it isn’t the fear of this could continue to weigh.
  • The combination of the Fed and low oil prices causing ongoing problems for indebted US energy producers could cause more weakness in credit markets.
  • Political uncertainty could remain a threat in the Eurozone, particularly in relation to Spain (after its messy election) and around populist/extremist parties gaining support.
  • Chinese growth could disappoint with policy uncertainty around Chinese shares and the Renminbi continuing to unnerve investors.
  • Plunging emerging market currencies (and commodity prices) could trigger a default event somewhere in the emerging world on US dollar debt.
  • The loss of national income from lower commodity prices and the continuing unwind in mining investment and a loss of momentum in the housing sector could result in much weaker Australian economic growth.
  • More geopolitical flare ups – eg, South China Sea, tension between Sunni Saudi Arabia & Shia Iran, terrorist threat.
  • Factor X – there is always something from left field. Last year it was China fears.

Five reasons why the RBA will likely cut rates further in 2016

  • The outlook for business investment is still weak.
  • To offset a slowing contribution to growth from housing.
  • Commodity prices are weaker than expected.
  • The $A needs to fall further.
  • To offset the monetary tightening from bank mortgage rate hikes for existing home owners.

What does all this mean for your share portfolio?

For the full article please go to AMP economist Dr Shane Oliver

There is a lot of pessimism around and monetary conditions are very easy and likely to get easier still as while the Fed may start to tighten other central banks are still easing. A global recession is unlikely – deep and long bear markets normally require a recession (in the US at least). Share valuations are good, particularly against low bond yields and interest rates, showing 2016 investment themes give credence to some optimism.

 

 

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