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Ten Investment Themes For 2016

* January 8, 2016

Our Global Investment Strategy service recently published their Annual Outlook, which discusses the ten themes they expect to drive global financial markets throughout the year:

Theme #1: U.S. Growth Continues To Disappoint
The U.S. economy is likely to underwhelm, prompting the Fed to stand down from its ill-conceived plan to raise rates four times this year.

Theme #2: Euro Area: The Calm Before The Storm
The euro area continues to benefit from a weaker currency and a loosening in bank lending standards, but these tailwinds will ebb later this year.

Theme #3: Japan: Treading Water
Efforts by Japanese policymakers to bring inflation up to 2% look increasingly elusive. Ultimately, some degree of debt monetization may be necessary to reflate Japan’s economy.

Theme #4: Emerging Markets: Out Of The Frying Pan And Into The Fire
The situation in many emerging markets is dire and could get worse as flagging growth causes financial stresses to surface.

Theme #5: The Call Of The Trumpists Reverberates Around The World
Globally, the political backdrop remains fraught with uncertainty, not just in the usual hotspots such as in the Middle East, but increasingly in developed economies as well, where populist politicians are finding a receptive audience for their message.

Theme #6: Safe-Haven Bond Yields Remain Depressed
One of our highest conviction calls over the past few years has been that safe-haven bond yields would stay depressed, even in the face of the tentative economic recovery in much of the developed world. Treasury yields could drift higher over the next few months, as the Fed starts to prep the market for a second rate hike, but we ultimately expect the 10-year yield to finish the year at around 2%.

Theme #7: Credit: Too Soon To Enter The Junkyard
Last year’s selloff in high-yield credit has made this asset class more attractive from a valuation perspective. However, with U.S. corporate balance sheets still deteriorating, spreads could continue to widen.

Theme #8: Global Equities Struggle To Defy Gravity
The Global investment Strategy service downgraded global equites from overweight to neutral last month, after having been overweight this asset class since April 2009.They continue to favor DM over EM equities and defensive sectors over cyclical ones. Within the DM equity universe, they have a modest preference for the euro area and Japan over the U.S.: The Fed is hiking rates, U.S. stocks are considerably more expensive, and there is less scope for profit margins to increase. Within EM, they advocate avoiding countries such as Brazil, South Africa and Turkey, which are vulnerable to sudden stops in capital flows, preferring instead economies such as China, which have the policy tools to deal with weaker growth.

Theme #9: Commodities: The Bear Market Persists
While a variety of geopolitical developments could give crude prices a temporary lift, ongoing technological progress in shale will continue to push down breakeven costs, and ultimately, prices. Likewise, rising mining supply, combined with China’s transition to a more service-oriented economy, should cap any rally in bulk and base metals. Gold will remain in a prolonged bear market.

Theme #10: An Increasingly Narrow Dollar Rally
The dollar will continue to strengthen this year, but mainly against EM and commodity currencies.

http://blog.bcaresearch.com/ten-investment-themes-for-2016

• George.