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What’s in store for global equities in 2016?

29 December 2015

Investors take a closer look at the issues facing global equity market as we move into 2016 after a rather turbulent past 12 months.

By Gary Jackson,

Editor, FE Trustnet

Global equity markets were moved by several key events in 2015, which included the European Central Bank embarking on quantitative easing, for the first time, Greece’s financial crisis, the Federal Reserve’s interest rate deliberations and plunging commodity prices.

These events broadly led to strong gains in equity markets at the start of the year, but they soon gave way to a summer of increased volatility and ultimately caused most markets to come to the final days of the year with relatively modest gains at best.

As the graph below shows, the FTSE All Share has made a 1.10 per cent gain over 2015 to date. This compares with a 6.05 per cent rise in the S&P 500, a 4.93 per cent gain in the Euro STOXX and a 10.42 per cent fall in the MSCI Emerging Markets index. Japan has done somewhat better.

Performance of indices over 2015

 

Source: FE Analytics

Russ Koesterich, global chief investment strategist with the BlackRock Investment Institute, argues that most equity markets have been “running on empty” across the course of 2015, with problems such as flat or falling earnings being hidden by rising price-to-earnings ratios and dividends.

“The question for 2016 is whether, with global financial conditions slightly tightening, the markets can stand on their own legs,” Koesterich said. “If companies are to grow earnings, a return to top-line growth is essential – especially for markets where valuations are high.”

Research from the BlackRock Investment Institute suggests that the movements in the US dollar and the oil price will be critical to the fortunes of global equities in 2016.

Further gains in the dollar would intensify pressure on commodity prices, emerging market currencies and US profits by making its exports less competitive, while falling oil prices would bring down long-term inflation expectations even more and could encourage some central banks to step harder on the monetary accelerator. 

Sebastian Radcliffe, manager of the Jupiter Global Equity Income fund, points out that every stock market cycle will have particular characteristics that define how long it is likely to run for and investors have to keep in mind that the strong run of recent years could not keep going forever.

The bull market of the 1990s came to a head with the dot.com bubble and the rampant overvaluation in large caps generally, the mid 1970s saw the ‘nifty fifty’ bubble and more recently there have been debt-fuelled consumer booms in much of the developed world and a natural resource boom driven by emerging market growth.


 

“What has been a consistent feature of such times is the bifurcation between stocks and sectors that were in fashion and those out of fashion – the part of the old order that deserved to trade at steep discounts to the market and in hindsight would go on to subsequently be the best performing asset class. This has been a feature of the current bull markets where value has had the ignominious record of lagging both rising and falling markets,” Radcliffe said.

“Whether we are approaching something of an inflection point will remain to be seen. What is noticeably different today is that there exists a uniform overvaluation that spans much more of the market than has historically been the case. The principal driver for this state of overvaluation has been the extreme policy response to what at the time was an unfolding crisis that would join the ranks of the 1930s for its gravity.”

“As such there have been far fewer places to hide from overvaluation this cycle than most others. That’s not to say we’re due a bear market, but it’s unrealistic to expect further gains from those valuations going ever higher, especially as the US Federal Reserve considers a ‘normalisation’ of interest rate policy.”

Andrew Milligan, head of global strategy at Standard Life Investments, says that with 2016 looking like it will be another challenging year for investors, a selective approach is needed.

“We encourage a highly selective, relative value approach, preferring developed to emerging market assets, and a preference for Europe or Japan which will both benefit from lower commodity prices and an improving economy. Conversely, we are … underweight in stock markets which are relatively expensive or too exposed to commodity pressures, such as the US or developed Asia.”

Performance of commodities over 2015

 

Source: FE Analytics

“Into 2016, key triggers to raise or lower risk exposure in portfolios will include the direction and extent of the dollar’s move, the success of China’s policy stimulus and the impact of Federal Reserve policy tightening on highly indebted emerging market countries.”

Milligan notes that global equity returns are broadly flat 2016 to date within a 15 per cent range during the year and says that more of the same is likely to be seen in 2016 – namely modest total returns accompanied by sharp market cycles.


 

Considering global equity strategy for the year ahead, Bank of America Merrill Lynch Global Research says that global stocks are expected to rise by 4 per cent to 7 per cent across 2016. It expects standout areas to include Japan across the board, European banks and US high-quality cyclicals.

The group agrees that market conditions means a selective approach is likely to be best way to proceed from here.

Candace Browning, head of BofA Merrill Lynch Global Research, said: “We’re seeing an aging bull market with a lot of upside potential in it, but also the beginning of slow, steady growth in the capital markets and innovation-led shifts in business cycle.”

“The greatest opportunities for investors may be found among carefully selected, healthy dividend-paying stocks and thematic investments in innovators reshaping market dynamics over the next decade.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.