As 2015 ends, there are two schools of thought about what 2016 may bring for the global economy. Some investors, based on the experience of a volatile 2015, remain cautious about the year ahead and continue to value defensive stocks (those that tend to retain their value during economic downturns, e.g. pharmaceuticals). However, others take a more optimistic stance and foresee a slow return to a more normal economic cycle as central banks begin to raise interest rates from recovery levels and sentiment improves. In this scenario cyclical shares (those that do well in an improving economy, e.g. consumer goods) would tend to perform well.
As market participants watch to see how things pan out it is likely that 2016 will, like 2015, be dominated by interest rate policy, in particular how high and how quickly the US Federal Reserve proceed to raise rates following their first rise in nine years in December 2015. While the strength in the US domestic jobs market allows the scope for further rate rises, higher rates could strengthen the dollar, with knock on consequences for global growth as many countries and companies borrow in US$. The decision to raise rates in the US is also at odds with European policy, where the European Central Bank recently cut interest rates from -0.2% to -0.3% and the Bank of England have continued to keep rates on hold.
All of this creates uncertainty for what might happen next, and in the markets uncertainty usually results in volatility. Therefore one thing that might be said about next year with a reasonable degree of confidence is that increased equity market volatility is to be expected until the implications of the Fed’s decision become clear.
China is also likely to remain a hot topic in 2016, as investors look for signs of success (or otherwise) in China’s attempts to shift the focus of its economy from exports to domestic consumption. The answer will undoubtedly have a major impact on global growth and could also have a significant knock-on effect on other emerging markets.
The UK is in a low growth, low inflation phase - a situation that is expected to continue over the coming 12 months.
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