Yes, as you know it, the investment mood is mellow as we head into 2016. Staying vigilant will be the key advice for the new year. How investment decisions will pan out in the coming twelve months will be largely dependent on the following key developments.
Global Growth Risk
The decelerating pace of growth in China, the world’s second largest economy, may become a major drag to world growth in 2016. As China attempts to rebalance its economy from that of being largely dependent on manufacturing and investment to that of being led by services and consumers, demand for commodities has dropped significantly. This, in turn, has an adverse impact on the growth outlook of many emerging economies especially those supplying raw materials to the Chinese factories.
The moderate growth pace anticipated for the US and Eurozone are unlikely to offset China’s slowdown. Japan, on the other hand, will continue to experience its own unique set of challenges.
Divergent Monetary Policies
Eurozone, Japan and China are expected to continue with their easy monetary policies to enhance growth whilst US has embarked on a tightening cycle. The normalising of the Fed policy and the improving fiscal condition in the US will reduce the supply of the Dollar for trade and investment.
The Fed’s interest rate hike cycle, if fully implemented in 2016 ie. four quarter-point increases, will have far reaching consequences beyond the US shores.
According to BIS (Bank of International Settlements) data, Dollar-denominated debt held outside the US had grown from US$5.6 trillion in 2008 to US$9.2 trillion in 2015. Growth slowdown and higher debt servicing cost will exert downward pressure on corporate profits. Default risk of high-yield or junk bond issuers are rising. Investors are well advised to stay alert to the danger of a liquidity event as more bond funds are suspending redemptions.
The trajectory of US interest rate and commodity price trend in 2016 will have a noticeable and direct impact on world currencies. The Chinese move to devalue its currency in August 2015 was a significant development. The change of Yuan’s benchmark from that of the US Dollar to a trade-weighted basket of currencies will give China greater flexibility to move the Yuan. Greater volatility in the global currency market is therefore expected in 2016.
Although the world economy should expect a moderate pace of recovery in 2016, manufacturing slowdown in the larger economies and the supply glut facing key commodities – oil, coal, iron ore, etc will continue to exert downward pressure on commodities prices. More distressed asset sales are on the horizon.
Last but not least, geopolitical risks in the Middle East, Russia – Ukraine, and the South China Sea, will add to investment uncertainties in 2016. Bear in mind that the US has always been perceived as an investment safe haven in the event of turmoil. Therefore, in the new year, it is important to closely track the flow of investment funds into and out of emerging markets.
That said, life goes on and there will still be pockets of opportunities out there. You just have to look closely, do your homework, and weigh out your risks appetite. Welcome to 2016.