The BII warned investors will need to pay much more attention in 2016 to the business, credit and valuation cycles, as the impact of the monetary policy cycle fades. ‘Careful navigating’ will be critical because key cycles now appear to be out of sync.
“The question for 2016 is whether, with global financial conditions slightly tightening, the markets can stand on their own legs,” said Russ Koesterich, global chief investment strategist with the BII. “If companies are to grow earnings, a return to top-line growth is essential – especially for markets where valuations are high.”
The BII believes the effects of movements in the U.S. dollar and oil prices will be critical next year. Further gains in the dollar would intensify pressure on commodity prices, emerging market currencies and U.S. profits by making its exports less competitive. Falling oil prices have dragged down long-term inflation expectations and could encourage some central banks to step harder on the monetary accelerator, it noted.
“The outlook is made even more challenging because long-term trends such as aging populations, high debt loads and technological change are intersecting with short-term cycles, meaning that the high growth rates of the past may not return,” said Ewen Cameron Watt, global chief investment strategist at BlackRock. “But the good news is that we see a modest pick-up in global growth and a renewed investor focus on fundamentals.”
Overall, going into 2016 the BII said it prefers equities over bonds, particularly European and Japanese, with many US equities looking fully valued. It expects lower returns than in the early post-crisis years.
