The 2015 backdrop to the market outlook for 2016 –
As 2015 drew to a close, we reflected on the disappointments of the year from an investment returns perspective. We then turned our minds toward 2016 hoping, rather than expecting, that the market outlook is for a better year. We now present the market outlook that will guide the ContinuumFP investment recommendations for 2016, at least initially.
Our superannuation funds exist in somewhat a parallel world to our daily lives. Our daily lives during 2015 gave rise to moments of joy, hope, loss – and a range of emotions. Meanwhile, our funds invested through superannuation and otherwise, have also been exposed to significant events effecting financial markets.
2015 was marked with a series of market-influencing events, from
- the very public stoushes staged by Greece and the ECU;
- the equities market (and currency) volatility triggered by the US Fed ‘suggesting’ during August that they might start the journey towards normalising their interest rates at their September meeting;
- the reactions to terrorist attacks at various venues around the globe. These events, surprisingly, had little impact on market stability; and the actual other major markets event was
- the Chinese economy.
Most of these events led to market volatility. In the main however, leaving the equities (and the fixed income (Bond)) markets little changed from their 2014 close.
If your investments are heavily weighted in favour of an Australian asset allocation it will have been a disappointing year. If however, you have employed a diversified portfolio, then you may still have finished the year in positive territory.
Your investment timeframe will affect your concern over the market outlook…
Interesting headlines lead many of us to read – often with concern – the predictions made by various investment market commentators. Any one year in a long-term investment timeframe should not significantly impact the strategic outcomes for that investment. In this situation, market outlook predictions in the daily media should only of passing interest.
All investors should undertake an investor risk profile assessment. By this process, your personal capacity to deal with investment market performance over your investment timeframe is appraised. Typical financial goals for which timeframes are determined, include:
- retirement;
- acquisition of a major lifestyle asset; or
- relocation to a new residential environment, to name a few.
Your investment timeframe beyond 2016 will determine how consequential the market outlook – and its attainment during 2016 – is for you. Investment timeframes beyond three years will almost certainly benefit from an asset diversification strategy.
Diversification through managed funds
An effective way to achieve diversification in your investment portfolio is to invest through fund managers. Managed funds operating in Australia are pooled funds entrusted to fund managers under a managed investment scheme. These funds allow access to resources not readily available to individuals who are not amongst the high net wealth class. Resources such as –
- Market analysis;
• Portfolio construction strategists;
• Investment analysts;
• Economists; and
• Researchers.
Managed funds can be single asset class funds such as share, property, bonds, infrastructure funds. They can be quite diversified within that asset class. The manager would not likely be investing all of their client’s money into one company or venture. They would not hold ‘all of their eggs in one basket’!
And not all fund managers adopt the same approach as to how they will allocate investment funds into the market. Some adopt a growth strategy, some an income approach and yet others, a value approach. And there is a range of hybrid strategies in between. Their investment philosophy can also vary from indexed (passive), active, concentrated, and so on.
The investors’ portfolio can achieve diversification by:
- blending fund managers with different strategic outlook,
- investing in a range of managers so as to cover a diversified asset class range, or
they can select from a range of multi-manager funds whereby the portfolio will be made up of the various asset classes. Achieving the goal investing strategic proportions, through a selection of managers within each asset class.
So, what is our market outlook for 2016?
The ContinuumFP perception is that the market outlook for 2016 is looking OK – but not stellar! (It started dreadfully, but that probably improves the chances of there being a better result for the rest of the year. Although, this is an outlook not fully able to be appreciated by those who are already invested.)
The economic blocs
The scene appears to be set for a divergence of economic outlook for the major economies. The USA looks to be the brightest star in this sky, followed by China. However, Europe, the UK, Japan and others are expecting only sub-par GDP growth for the year ahead. And Brazil and Russia are mooted to be drifting into Recession.
The US Fed has clearly indicated that they will start to raise interest rates in December 2015. They have been clear that they will continue to raise rates towards a ‘normalised’ level. Indications are that this will take ‘a reasonable length of time’. Many analysts are suggesting that the rate will be 1% by the end of 2016. Meanwhile, the BoJ and the ECB have given strong signals that further quantitative easing is ahead for their economies.
There is quite a deal of speculation surrounding the persistent strength of the Aussie dollar. That there will be at least one interest rate cut by the Reserve Bank of Australia (the RBA) during 2016. Currently, we anticipate this cut during the first half of 2016. The continuing fall in mineral resource prices does not support this anticipation of an interest rate cut. Generally these price falls would result in a decrease in the exchange rate. However, with the AUD lingering around the USD70c, it is not offsetting the possibility of a rate drop yet.
Where goes the money?
The scene appears to be set for a divergence of economic outlook for the major economies. The USA looks to be the brightest star in this sky, followed by China. However, Europe, the UK, Japan and others are expecting only sub-par GDP growth for the year ahead. And Brazil and Russia are mooted to be drifting into Recession.
The US Fed has clearly indicated that they will start to raise interest rates in December 2015. They have been clear that they will continue to raise rates towards a ‘normalised’ level. Indications are that this will take ‘a reasonable length of time’. Many analysts are suggesting that the rate will be 1% by the end of 2016. Meanwhile, the BoJ and the ECB have given strong signals that further quantitative easing is ahead for their economies.
There is quite a deal of speculation surrounding the persistent strength of the Aussie dollar. That there will be at least one interest rate cut by the Reserve Bank of Australia (the RBA) during 2016. Currently, we anticipate this cut during the first half of 2016. The continuing fall in mineral resource prices does not support this anticipation of an interest rate cut. Generally these price falls would result in a decrease in the exchange rate. However, with the AUD lingering around the USD70c, it is not offsetting the possibility of a rate drop yet.
How resourceful can we be?
The recent trend in mining resource prices is for decline as global economic growth slows. However, the owners of the substantive resources reserves continue to extract and sell into the market, thus keeping prices suppressed. We expect this situation to persist throughout 2016 and perhaps beyond. There is ‘good news’ in this regard for Australia. Our country has a number of the world’s largest reserves and extract using some of the world’s most cost-efficient processes. The consequent cashflow into our economy will help to sustain it during a period of transition. We anticipate pivoting from mining infrastructure development, to a more broadly-based services economy.
Inflation; and Growth
Expectations for growth and for inflation are somewhat tied. The divergence in economic performance between the USA and pretty much the rest of the world, makes this a difficult call. The forecasts have been declining over time with a recent prediction that global growth for 2016 will be sub-4%. This is in spite of the continuing improvement in the US – and the sustained growth in China of around 6%.
What we can be fairly certain about however, is that the low price of crude oil will not be a drag on inflation this coming year. We have now passed the twelve month mark from when the prices so dramatically collapsed and yoy comparisons will ease.
Some (tongue in cheek) forecasts for the end of 2016 –
ASX All Ords – in the range from 5,450 to 5,550 (assuming 31 December 2015 level of 5,200)
AUD/ USD – in the range from 63c to 67c (assuming 31 December 2015 level of 72c)
RBA Interest Rate – 1.75%
Concluding summary:
Whilst the global outlook is fragmented, the market outlook for Australia is a little more optimistic than might have been the case mid-year. As we continue to see diminishing support for the AUD against the USD, our manufacturers and exporters will become more competitive. With low domestic interest rates, we should see continuing recovery in both employment levels and the GDP. Whilst a year of modest growth, it is our view that 2016 should set Australia up well for the following couple of years.
