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Navigating changing expectations with agility

Changing expectations in 2016 will see moments when risk reprices, paving the way for new investment opportunities, according to Mr Duret.

SETTING the investment direction for 2016 may not be enough for investors. We also need to navigate the changes in market expectations that are, by nature, fleeting.

While we expect the economic recovery in the United States and Europe to eventually lift emerging economies, the level of market confidence in this scenario may fluctuate.

Deviations from expectations may create volatility

The financial community expects the US Federal Reserve to raise its official rates at a modest pace, and that the European Central Bank will be moving in the direction of more negative deposit rates. The jury is also still out on how far the People's Bank of China will need to ease liquidity to stabilise confidence.

Any small deviation from the expected course of a moderate recovery or unexpected changes in monetary policy will likely be magnified by market sentiment, which may in turn affect financial market prices.

The global economy and financial markets have shown resilience, considering the risks experienced and their global repercussions.

Within a relatively short time, markets have endured the sub-prime debt crisis in the US, the serial debt crisis in the eurozone and the consequences of the prolonged reversal of commodity prices in emerging economies.

But even this resilience may be further challenged by the transformation of China or any risk of a slowdown in developed markets.

The volatility experienced at the very beginning of 2016 looks more an echo than a replay of the market turbulence seen in August 2015. This is because the element of surprise is now missing, and policymakers remain on their guard.

Such an environment calls for investing with agility. It also requires international diversification and focus on the key areas where fundamentals add resilience to portfolios.

International layers in asset allocation provide a safety net

Our view on asset allocation includes looking for stable future returns, driven by our fundamental convictions and paying attention to new challenges in diversifying assets. The unfolding economic recovery and the persistence of low funding costs remain the driving forces behind equities, and in particular, for those in Europe and emerging Asia.

We remain "overweight" in equities, but the seven-year old bull market is maturing. This reduces the potential for the broad market indexes to move ahead of corporate earnings progression. The bull market's maturity argues for residual diversification into corporate bonds ("strongly underweight") and hedge funds ("overweight"), which are less vulnerable to market volatility.

We also recognise that fears of a slowdown in growth or geopolitical events can cause disruptions, and there will be occasions when judgement and agility will make a difference, as our economic recovery assumption may be challenged in the short term.

Our allocation also favours European equities that were late to benefit from the expansion of earnings margins. The low level of the euro and muted energy prices are still expected to favour margin expansion for European companies. The uncertainty around macro trends should lead to investors' continued attraction to current winners, such as companies in the information technology and healthcare sectors.

Investment thematic highlight: travel sector

Firms related to the travel industry are expected to benefit directly from low energy prices (low input prices) and indirectly (higher demand due to higher disposable income). These companies will also likely be less sensitive to the ebbs and flows of the economic cycle, as they rely on fundamental economic, demographic and societal changes.

Within emerging economies, the rise of the middle class has had a strong impact on travelling and tourism. In China, for instance, a growing part of the population has the means to travel internationally. As a result, the Chinese travel and tourism industry is now turning into a mass market, where it used to be only for the happy few.

The global travel and tourism industry is going through a transformation, as new entrants disrupt traditional business models. This is benefiting budget airlines and also changing the game for hotel chains and cruise companies, which are expanding to meet the needs of the mass market. New online players facilitating access to these markets may be potential winners.


Changing expectations in 2016 will see moments when risk reprices, paving the way for new investment opportunities. We expect commodity prices to reverse in the first half of 2016, while higher US interest rates will start to make corporate bonds attractive later in the year.

  • The writer is chief investment officer, ABN Amro Private Banking