New year offers better returns but not all smooth sailing

2015 was an incredibly challenging year for investors, with equities, bonds and commodities in most areas seeing negative returns and heightened volatility. 2016 is expected to be just as difficult. Adapting to the changing environment will be vital, but overall we expect global equity markets to generate positive returns and outperform bonds next year.

The key question is whether the 15 per cent decline in global equities in mid-2015 is indicative of a forthcoming recession in the US. If it is, then it clearly warrants a more defensive positioning by investors. However, we take a different view in our outlook for 2016. While the US economy is likely heading into late cycle, the current economic expansion is likely to continue well into 2017.

Normally, US recessions are caused by the Fed tightening its monetary policy aggressively as the focus shifts from supporting growth to fighting inflation. In contrast, 2015 was characterised by strong disinflationary pressures. While these are likely to abate as we go through 2016, excessive capacity in Europe and China is likely to cap inflationary pressures globally. Therefore, we expect the Fed to tighten monetary policy only very gradually. Elsewhere in the world, growth is expected to pick up modestly as monetary and fiscal policies ease somewhat. The exception to this outlook remains China, where structural headwinds are likely to constrain growth, looser policies notwithstanding.