After a year characterised by extreme volatility, asset managers have been busy analysing what next year will have in store for investors.
Hermes Investment Management expects greater central bank monetary policy divergence. It expects US and UK interest rates to peak at 3.75% and 2.25% respectively, contrasting with continued monetary easing by the European Central Bank and the Bank of Japan.
Hermes does not expect a wide emerging market emergency. Lower external debt ratios, fewer fixed currency pegs to protect, and an ability to run their own quantitative easing programmes are supporting factors which make comparisons with 1994, when most assets were hit hard, “look superficial”, says Neil Williams, group chief economist at Hermes.
Rowena Macfarlane, sovereign analyst at Standish Mellon Asset Management, part of BNY Mellon, thinks that political risk will be a hallmark of next year. She says that as core Europe has recovered at a faster pace than peripheral nations, economic unrest has resulted in a polarisation of European politics.
“The Grexit debate is also likely to resurface in 2016. This is because the bailout conditions the Greek government eventually agreed on require more austerity and spending cuts, which will prove unpopular when implemented,” says Macfarlane.
State Street Global Advisors (SSGA) appears bullish on Europe’s prospects for next year, saying there are strong growth opportunities in the region. According to the firm, this is because the economy is underpinned by several strong market conditions, including quantitative easing, low interest rates, a weaker euro, low material costs and low energy prices.
SSGA believes small-caps are poised to profit from predicted European growth but could be buffeted by increasing volatility. However, it suggests that managed volatility strategies can give investors exposure to growth while protecting portfolios.
“For a year that was supposed to be characterised by accelerating growth in the world economy, 2015 was slow to get out of the starting blocks and conditions are unlikely to change much in 2016,” says Christopher Probyn, SSGA’s chief economist.
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