Highlights from the Global Investment Management 2016 outlook

Wade Balliet
Posted by Wade Balliet
Investment Strategy

The Global Investment Management (GIM) team continually looks forward to evaluate our forecasts and investment allocations decisions. We believe that 2016 will see the emergence of some major themes — both old and new — that will drive financial markets. These could include issues surrounding domestic monetary policy, global economies, geopolitical risks, and many more. Under the right circumstances, all of these could contribute to market volatility and investor uneasiness.

Back view of man sitting at desk with view of 6 different monitors of stock market activity.The major themes for asset allocation

Our three asset classes — equities, bonds and alternatives — will ultimately be affected by most of these themes. While some will be easy to predict, others will come unexpectedly as the social and political landscape changes as a result of events at hand. Some of these risks may impact domestic markets while others may spill over across the globe. A sound asset allocation strategy and strong constitution during these uncertain times can help keep objectives on track. Maintaining an allocation to the three major legs of our strategic asset allocation model will likely improve the odds that portfolios will experience below market volatility.

Volatility, as measured by the CBOE Volatility Index (VIX), in the U.S. market will likely increase over the next 12 months. Having coasted on the wave of lower volatility versus historical averages (16.10 versus the 20-year average 20.95), the tide will likely soon change. A multitude of factors will likely contribute to the uptick including a national election, political activity abroad, and a divergence in monetary policy between the U.S. and the rest of the world.

Both the GIM team and the market expect the Federal Funds rate to rise at a slower pace than indicated by the Fed governors. We believe the Fed will be forced to take a longer wait-and-see approach than indicated by their most recent predictions in September.

Overall, investors should be concerned with these major themes: volatility, lower expected returns from stocks and bonds, divergent central bank, currency exchange implications, geopolitical risks, and the ability of the U.S. consumer to drive U.S. growth. A nimble tactical asset allocation strategy may take advantage of market mispricing and opportunities in 2016 and beyond.

Bond market: Path of least resistance

While policy moves will likely be the major story in 2016, we also anticipate credit to be a big driver of returns for bond asset classes. The widening in credit spreads, which affects both high yield and investment grade corporate bonds, is anticipated to remain above historical averages and potentially expand in 2016. Difficulties within the energy and materials sectors, which have struggled with the collapse of the commodities market, are likely to continue in 2016.

Additionally, a flatter yield curve and compressed interest rate margins could negatively impact the credit metrics of the financial sector, leading to overall underperformance in corporate bonds as these three sectors account for approximately 43 percent of the outstanding corporate bond market. We anticipate that consumer-driven debt sectors such as the mortgage and asset-backed sectors will likely outperform in 2016. We are less optimistic on debt sectors, which contain more exposure to the business cycle, as wage growth and higher interest rate costs limit profit margin expansion. We will continue to position the strategy on a relative basis to capitalize on this opportunity.

Our outlook for the municipal market is more optimistic as we expect tax-exempt assets to outperform their taxable counterparts for a second year in a row. Internationally, we expect the difficulties surrounding emerging market debt in 2015 to carry over into next year and continue to plague the asset class. The combination of slowing economic growth in emerging economies, commodity collapse, and a stronger U.S. dollar will be an ongoing negative headwind for the sector.

For the complete Global Investment Management 2016 outlook report, including insights on global exchange rates and alternative strategies, click here.

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Please read the entire newsletter and the important disclosures therein. Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation does not ensure a profit or guarantee against loss.

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