Rate rises and divergent monetary policy globally present new challenges for investors and heightened volatility is to be expected in 2016, according to Paul Niven, head of multi-asset at the firm.
That said, the US is coping well despite deteriorating economics of production there, according to Niven. “The labour market continues to perform well and, while it seems to have been a close call, the US Federal Reserve was confident enough to raise interest rates in December,” he said.
Meanwhile, government bond markets have behaved well since then and the bond bears have been confounded again as concerns over inflation levels and heightened risk aversion have dominated, according to Niven.
“Our view remains that US equities will continue to be challenged by rate rises, peaking margins and valuations, which are unforgiving of any corporate disappointment. Europe, despite weak inflation observations, should continue modest improvement with equities there providing scope for outperformance,” he added.
The decline in the yuan is pressuring other emerging market currencies, raising risk premia across a broad range of assets and leading investors to speculate how far the Chinese authorities will allow their currency to fall, Niven said.
He added: “Events in China are pushing emerging market assets to new lows and, while currencies look undervalued in aggregate, the broader value case for emerging markets remains ambiguous. They will only offer genuine value when fundamental prospects offer upside surprise or when risk scenarios are more fully priced in.”
In terms of asset allocation, BMO remains overweight European (ex-UK) equities, likewise in investment grade credit, while neutral in commodities as optimism is increasing with regard to higher commodity prices, Niven noted. The firm maintains an underweight for North America, as US earnings have been disappointing.
