Rather 2016 will be the year of using high yield and a mix of alternative strategies / financial products as the way to hedge portfolio risk. And the market’s fixation on a strong US dollar is probably wrong as the greenback tends to peak before a rate hiking cycle commences, writes Coutts global chief economist, Mark McFarland
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The year 2015 is when market conviction was tested. As of 11 December, very few asset classes are offering positive returns for the year. Russian equities have proven to be one of the best but few signed up in January.
US dollar cash, Japanese and Eastern European equities are up. Sector themes – Technology, healthcare and consumer stocks are in the green. In fixed income, sovereign bonds in emerging markets are higher. Otherwise, there have been periods of gains turning rapidly into losses.
Next year is likely to be as interesting as 2015, with good value equity opportunities in many places, but safe-haven bonds no longer offers sufficient income to justify them being used in size.
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By GlobalDataRather 2016 will be the year of using high yield and a mix of alternative strategies / financial products as the way to hedge portfolio risk. And the market’s fixation on a strong US dollar is probably wrong as the greenback tends to peak before a rate hiking cycle commences.
Rollercoaster ride
Three or four big broad events shaped the year. Confidence in the ability of central banks to underpin markets waned steadily as markets lost track of what the US Federal Reserve’s long-term policy on interest rates – to start raising its benchmark rates because of economic data or internal politics?
Markets also lost faith in China equity markets when prices collapsed in late June, China’s equity market suffered a serious setback that left H-shares down over 20% on the year.
Oil prices tanked, then rallied 50% and then tanked again to leave them down almost 60% since mid-2014. Dividend payouts held up in infrastructure sectors but these started to wilt as the year drew to a close. High yield bonds, with energy exposure, started to look like excellent distressed debt candidates given the conflicting supply noises coming out from OPEC and competitors nations.
Then there were those Emerging Markets where conflict, politics or bad debts threatened another market bust but to date all that has happened is a growth / trade slump. Deep value has started to emerge, if investors can work out where and when defaults are likely to happen.
Reasons to be cheerful
Forget the Fed. While there will be slightly higher US interest rates, the main story will be growth. Low oil prices act like a global tax cut and world GDP growth gains soon after prices fall. Market is 18 months into a commodity collapse and oil dividend should start to show up in consumer markets where oil is imported, not exported.
More spending means more production in developed and emerging markets. All those dreary purchasing managers’ indexes will be forgotten next year. This is good for equities, although the recent strength of US dollars leaves American equities out in the cold with the exception of banks that will benefit from higher interest margins. Japan, India, China’s H-shares, Singapore and European equities also offer market opportunities for 2016.
In the fixed income space, government bonds remains a poor hedging instrument though they offer protection against correlation. Investors may wish to hold shorter maturity corporate debt with higher yields and consider a mix of alternative strategies to better manage market volatility in underlying asset prices and derive dividend income.
Investors with multiple currency exposure, in particular for US dollar may see the greenback gain a little as markets get used to higher US interest rates as every one appears to long dollars. Hedging dollar gains was right in 2015, but the combination of weak global growth and policy loosening in Europe and Asia that boosted the greenback will likely be reversed, so it makes sense to be a contrarian.
