The uncertainties in China, currency drops, and Asia’s dominant position in the world’s wealth map – Michael Stiefel, Investment Solutions & Advisory, Julius Baer, Zurich, writes about all that 2016 is expected to unravel and the big themes the wealth management industry will be tackling this year and beyond
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Macroeconomic trends remain an important challenge in 2016. Since various parts of the globe are at different stages, momentum is not developing simultaneously. The US economic recovery will be in its seventh year in 2016. Consequently its trend is increasingly mature and momentum will start to fade. In contrast to this the three-year old Eurozone recovery still offers increasing growth potential.
China remains a major cyclical risk globally, but will not fall off the cliff. The authorities there will need to step up infrastructure spending and cut interest rates, which should help to cushion the slowdown in 2016.
The year 2016 will be about separating the wheat from the chaff. Emerging markets are expected to finally reach their lows and reboot their economies. According to Julius Baer there are five aspects that need to be observed: the macroeconomic backdrop, leverage, earnings dynamics, valuations and currencies. It will likely be another difficult year for emerging markets but with silver linings on the horizon for individual countries. A structural bull market can be excluded with a high probability.
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By GlobalDataCurrency drops in many emerging markets have yet to result in an improvement of their macroeconomic imbalances. Therefore probabilities are high for 2016 to see a bottoming process and/or cyclical rallies in individual countries. A pre-condition for individual countries to perform is that gross domestic product growth in the US, Europe and Japan remains on track, as we live in an interconnected and interdependent world and correlations between country growth and global growth have largely increased.
Asia remains our favourite region from a risk/return perspective. The key arguments are that first, most Asian countries run a current account surplus and have room for fiscal and monetary stimulus measures if needed. Hence, emerging Asia is shielded against higher US interest rates. Second, valuations in combination with earnings dynamics are attractive in emerging Asia. Third, as long as commodity prices remain depressed, net energy importers are at an advantage. Terms of trade have strongly increased and should be an important economic tailwind.
Beyond 2016, the outlook looks more appealing. Future shifts in society and technological progress will influence the way we work and live. In the past, revolutionary technologies generated substantial economic growth – and very high investment returns for investors who spotted them at an early stage.
At Julius Baer, we look at the secular changes taking place in society that are already fundamentally altering the way we live and work. As one of the key themes of our Next Generation initiative, our research analysts are analysing the rise of the global middle class, especially in Asia. In 2010 the OECD published a report predicting that the global middle class, driven by powerful demographic trends, will almost double by 2020 and roughly triple by 2030. Asia Pacific’s share of global consumption is expected to explode from 23% in 2009 to almost 60% in 2030. Despite the latest market turmoil, there is little doubt that the 21st century is poised to become the Asian Century.
Asia is continuing to follow its steady path to become a major production centre for the world and also a major region for consumption. Wealthier Asian consumers with increasing discretionary incomes will have an effect on global consumer demand. This trend will lead to an unparalleled consumption boom in the region.
Additionally, the demand for health and education services is likely to significantly expand as well. The changing and increasing consumption habits will unlock business and investment opportunities in a range of sectors including communications, healthcare and medical services, gaming, luxuries and education amongst others.
