Behind the forecasts for 2016
From a news article, this is how investments and economic experts see the world in 2016: “We are now just one big shock away from a global downturn; equities are going to do well in 2016, especially banks and blue-chip businesses; we will begin to see a recovery in the prices of natural resources; study Latin America; expect a lift on interest rate; expect further divergence between the Fed and the ECB; China will just be fine; think like a millennial; growth is coming in 2017.”
The leading caption is scary. It portends of a worldwide recession that—according to its author, Ruchir Sharma, head of emerging markets equity and global macro at Morgan Stanley Investment Management—is “most likely to originate in China” owing to several factors, including the country’s “heavy debt situation, excessive investment, and population decline … combining to undermine growth.”
Thomas J. Lee, managing partner at Fundstrat Global Advisors, on the other hand, expresses exuberant confidence that “equities are going to do really well in 2016, especially banks and blue-chip businesses.” Lee feels the planned rate increase by the US Federal Reserve will surely make banks benefit from it. It “will boost their returns on equity as the economy expands.” In this environment, he adds that “blue chips will have the ability to generate stronger returns as the economy picks up.”
This optimism is equally shared by Barbara Byrne, vice chair of investment banking at Barclays Capital. She sees “a recovery in the prices of natural resources,” particularly oil. She feels this will happen largely on “political reasons.” She said countries like Norway and Saudi Arabia, whose sovereign wealth funds had suffered over time due to the decline in the price of their primary product, will do something, for they “will not be able to afford fluctuations in their reserves.” She sees oil price at “$60 per barrel.”
A spoiler to this forecast was last Friday’s decision by the Organization of Petroleum Exporting Countries (Opec) to maintain production output, which may further delay a desired higher oil price. Already, it sent the price of oil to break below $40.00/barrel.
A ray of hope is seen within the Latin American region, according to Tulio Vera, chief global investment strategist for J.P. Morgan Latin American Private Bank. He says, “We are getting closer to a re-entry moment for some of these markets.” While he admits the investment landscapes are still uncertain in Argentina and Brazil, he expects “Mexico to benefit well from the US economic recovery, especially in the auto industry.”
With an improving economic climate, “inflation risk premia will return to the markets,” according to Jim Caron, a managing director at Morgan Stanley Investment Management. This should possibly lift 30-year treasury yields to 3.75 percent, he adds.
For the euro zone, Erik Nielsen, chief economist at UniCredit, advises to “expect further divergence between the Fed and the ECB,” considering the latter’s economic status. He says the Feds “will be hiking rates a couple of times next year and the latter expanding its balance sheet more than it has presently announced.”
Even after cutting China’s 2016 GDP forecast to 5.8 percent from 6.7 percent earlier, Yang Zhao, chief China economist at Nomura Holdings, still believes there will be “no hard landing in China.” China’s labor market, accordingly, remains largely balanced.
In addition to being a controlled economy, the Chinese government is financially stable that it has the ability to step in and rescue its financial industry.
Katie Koch, managing director at Goldman Sachs Asset Management that oversees almost $100 billion in global stocks, has her sights on investment picks millennials might possibly create. She says millennial spending is increasing compared to baby boomers, who, in turn, are decreasing their spending as they retire. She further observes millennials “prioritize instant information, quick consumption, and healthy living.” To her, these are the “themes that resonate with the 2 billion worldwide born from 1980 to 2000.”
Finally, “growth is coming in 2017,” according to Joseph LaVorgna, chief US economist at Deutsche Bank. But this will be coming in slow, unlike that of “2010, the best year since before the recession.” He says this will only hasten after the US elects a new president to “pursue growth policies, since this economy (the US) hasn’t done well.”
Bottom line spin
Quite apparent in the foregoing forecasts is that while the US economy’s recovery is slow, it is certainly improving and that a rate increase is soon to be implemented. This will, in turn, seen to spur investments, better productivity and more profitability.
Best equity bets will be the banks and blue chip companies for their ability to generate stronger returns on a higher interest regimen and expanding economy. New services and business products will arise from millennials’ activities and consumption behavior. On the back of these developments, expect a lift on longer-term debt rates.
Recovery in the prices of natural resources, particularly oil, may have been pushed back a few more years owing to the latest Opec decision. But due to the world’s inability to supplant the use of fossil fuels, prices may recover. The use of these natural resources will possibly continue in the next 15 to 20 years, following the results of the 21st Conference of Parties or COP21.
Amid these challenges, which are varied and even conflicting, there is a clear message for the active stock investor for 2016: Make your own stock picks and avoid crowd behavior.
Subscribe to INQUIRER PLUS to get access to The Philippine Daily Inquirer & other 70+ titles, share up to 5 gadgets, listen to the news, download as early as 4am & share articles on social media. Call 896 6000.