Christian Gattiker, Head of Research at Julius Baer, gives his markets’ outlook for 2016
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Central banks are from Venus, the real economy is from Mars. This mismatch has been fuelling one of the greatest equity bull runs in post-war history, with economic growth and inflation rates falling short of expectations. 2016 will be a continuation of the saga, but with less vigour and some potential pitfalls from emerging market crises, which have already impacted on the global economy in 2015.
There seems to be a widening communication gap between central bankers and the real economy. This overarching theme of misunderstanding between major economic players and the related investment opportunities underpins our 2016 outlook.
Central banks are from Venus: they would like to assure price stability, mitigate harmful effects to the economy and – in some cases even – support growth. In harsh contrast, the real economy is from Mars: it is in a reckless Darwinian process of the survival-of-the-fittest business model, in a constant state of ‘creative destruction’ with industries dying while new ones arise. All this is driven by changes in population, economic policies and – most disruptively – technology changes. The history of financial markets since the beginning of the century has been shaped by an ever greater divergence of the two – Mars and Venus – as the real economy shifts its shape in a breath-taking manner, yet the monetary policy response stays the same.
The fact that only investors care about calendar years would imply that a lot of the deflation patterns in the real economy and the asset inflation in financial markets will continue in 2016. While we would fully subscribe on a fundamental basis to this view, we are cautious because much of this is already reflected in asset prices. If we look at the reflation measure (the bet that the world economy will rebound, driving up interest rates and commodities prices) of commodity versus government bond returns, it is at an all-time low at the end of 2015. Therefore, a rebound of inflation concerns would not come as a surprise.
Yet over the next twelve months, we think investors are better off taking the deflationary stance and banking on asset inflation. This means looking for some stabilisation in portfolios with long-duration government bonds, not taking major currency bets and adding anything that grows sustainably in the current low-growth environment. This could include European equities exposed to domestic Europe, as they will benefit most from a normalisation in European growth rates. Companies touted as digital disrupters are also poised to make an impact in 2016; creating new industries and infiltrating established ones.
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By GlobalDataWe expect more pain for emerging markets in 2016 and therefore consider it prudent for investors to restrict emerging market investments, however, a final retreat will possibly open a ‘buy of a generation’. The cyclical divergence between major advanced economies and emerging markets remains pronounced, so global growth in 2016 is set to stay modest, as deflation risks linger on.
Overall, we think that the volatility experienced in emerging markets and communications gap between central banks and the real economy, which was so prevalent in 2015, will continue in the coming year.
Mature-market investors are better to stay in their home currencies and look for growth assets.
