2016 Global market outlook: A tussle between bulls and bears?

January 7, 2016 Categories: Markets

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Russell Investments 2016 Market Outlook report and video are now available. Click here to view.

As we start 2016, it appears both those who are bullish or bearish on the world’s economies have something to say in their favour. A bullish scenario would see better-than-expected business news led by strength in the U.S. economy and the belief the U.S. Federal Reserve will continue to raise interest rates very gradually. This is what we think is most likely to happen in 2016.

In our favoured scenario, we see the most upside in Europe and Japan. These markets have the potential for more quantitative easing that might help to lift equities further. Also, as opposed to relatively expensive U.S. markets, equities in Europe and Japan seem fairly priced as we start 2016.

On the fixed-income side, we expect to see upward pressure on yields as the Fed likely increases rates throughout 2016. Credit returns, meanwhile, will likely be held in check by worries about profits and default rates.

As 2016 chugs along, we’ll be keeping a close eye on the following three indicators in particular:

  • U.S. non-farm payrolls. We’re hoping for monthly gains similar to what we’ve seen in the past quarter; that is, approximately 150,000 to 200,000 new jobs per month. If wage growth holds at around 2.5%, that will fit nicely with our favoured position of modest growth, modest returns, and a restrained Fed.
  • S&P 500® earnings-per-share growth. To meet our expectations for 2016, we’ll be looking for growth in the range of 3% to 5%.
  • Emerging markets. Exports from emerging markets are contracting, and that’s probably not going to change at least in the short-term. Exports need to rise before we become more optimistic about those markets. There also is the possibility that the continued trade slowdown in emerging markets could start to drag down developed countries as well

[You can see how our strategists forecast some of these figures, and others, for 2016 in our 2016 Annual Global Market Outlook report.]

According to our analysis of all such indicators, we believe 2016 will be a year of mid- to low-single digit returns for global equities, while Fed rate hikes will constrain fixed-income portfolios and credit returns will be held in check by worries about low profits and default rates. As a result, we see 2016 as a year in which active investment choices in investment portfolios may offer greater opportunity for successfully navigating global markets and reducing volatility.

We also don’t fully rule out a more bearish turn of events in 2016. We foresee two plausible, though less-likely, scenarios to support the case of those who are leaning towards a bearish year. In one, weak profits are likely to follow slowing economic growth in developed countries. As part of this scenario we think that several factors, including rising wages, continued strengthening of the U.S. dollar and rising interest rates could potentially hurt corporate earnings and bear down on the markets as a result.

A second bearish scenario could be fed by strong U.S. jobs growth. If that were the case, such growth could drive a hike in wages, reduce corporate profits and even lead to higher rate increases from the Fed as it would try to tamp down inflationary pressures.

However, considering all indicators and possible scenarios, we maintain our expectation of moderately positive returns for global equities in 2016.


 

To see more on our expectations for global markets in 2016, please visit our Global Market Outlook webpage.

Andrew Pease, Global Head of Investment Strategy

Andrew Pease

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