In 2016, investment will be an exciting year. The upswing in the US must prove its strength and shake itself free from the support of the central bank. On the contrary, for Europe, the stimulus from the European Central Bank must show its worth and bring growth to Europe. Emerging markets will continue to be difficult, and in the background, the war is lurking in the currency and oil markets. The investment committee’s investment committee nevertheless dares to come up with 10 bids for an exciting and returnable expected good 2016.
It is the thirteenth time that Formuepleje offers its best bet on developments in the financial markets in the year to come. The starting point for the bids is the main scenario with which the investment committee is working, and which points to continued good growth in the US and Europe, rising US interest rates and the dollar and continued low short-term interest rates in Europe.
2016 will be the year in which the US economy really shakes itself free from the financial crisis and must show that it can carry on recovery itself after a long period of help from the central bank. In Europe, the economy is still strongly supported by the European Central Bank, which is committed to ensuring that both growth and inflation will pick up in 2016. Among the emerging market countries, selectivity has never been more important. Countries such as Russia, Brazil, Angola, Nigeria, and South Africa will be challenged by low oil and metal commodity prices, which may force reforms.
Conversely, low commodity prices will be positive for large emerging market countries such as China and India, as well as the more developed countries such as South Korea and Taiwan. Against the background of its analyzes, the Investment Committee again offers 10 bids this year from an economic and financial point of view. The bids are part of the strategy that the committee has set for 2016, and which forms the basis for the expectations for a reasonably positive return. However, the committee is also very aware that 2016 will most likely offer surprises.
1. The dollar rises against Danish kroner/euro
The driving force behind the expectation of the rising dollar is the rate hikes that the US central bank has strongly indicated it will continue in 2016. The interest rate increase in December 2015 was the first increase since 2006 and the beginning of a normalization of monetary policy after the financial crisis.
Growth in the US economy has been kicked off by low-interest rates and the liquidation of the banking system since the financial crisis. It has created an abnormal monetary policy condition that must be normalized in order for the central bank to restore monetary policy as a future management tool. This normalization process began in the spring of 2014 with the announcement of the end of the bond buy-backs, and since the autumn of 2014 has been waiting for US growth and employment to show enough strength and stability for the economy to bear higher interest rates.
The turning point has now occurred and in line with an expected continued positive growth in the US economy of 2.5-3 percent in 2016 and continued progress in wages and inflation, the line of expected interest rate increases will send the price of the dollar up in relation to one euro. which appears to be weakening in 2016 as a result of the expansionary European monetary policy.
2. Global shares increase at least 10 percent measured in Danish kroner
In 2016, the crucial question is whether we will really be able to register the paradigm shift in the leading economies from the central bank-controlled economy to a more self-sustaining economy. That is the challenge in the United States. Share prices could only increase in 2016 if the growth in the real economy is translated into demand, which leads to increases in corporate revenue and settles on the bottom line as increased earnings.
The challenge is that the development in the US is two to three years ahead than in Europe. In the US, the US central bank will raise interest rates in 2016 because the economy is improving. If it really turns out to be a reality, a rise in share prices for US stocks must be driven by increased earnings. In Europe, what drives share prices is both increased revenue and earnings as a result of rising economic growth in 2016 compared to 2015 and the low commodity prices.
All in all, we estimate that the global equity return will be up to 5-10 percent measured in dollars. With an expected higher dollar, Formuepleje estimates that the return on global equities measured in Danish kroner will thus be at least 10 percent in 2016.
In mid-December, equities are not highly priced but are in the low end of the band relative to fair value. However, as a stock investor, one must be prepared for greater fluctuations in equities in 2016 that has been the case in recent years.
3. The oil price stays below $ 60 a day. barrel
The supply war in the global oil market is not expected to be completed in 2016. OPEC landing currently produces about 6 percent more than their official ceiling, and there is nothing to indicate that members of the organization can agree to reduce production, as OPEC The December meeting led to a decision on continued overproduction. In addition to that, Iran expects to increase its oil production by one million barrels a day, as sanctions against the country are lifted. This corresponds to about 1 percent of global day production of just over 90 million barrels.
Currently, oil stocks are about 10 percent larger than normal and growing. In the third quarter of 2015, inventories grew by 1.6 million barrels a day, and the total known stocks contain enough oil to cover more than two months of global consumption. With the current overproduction of oil, Iran’s re-entry into the market, the unwillingness to lower production and moderate global growth, including China’s slowdown in growth and the indicative forward prices, there is a good reason to believe that the oil price remains well below $ 60 in 2016.
4. The US central bank raises its key rate two or more times during the year
In December, the US central bank raised its key rate from the 0.0-0.25 percent range to 0.25-0.50 percent for the first time since 2006. Thus, the central bank initiated the third phase of its major monetary policy operation after the financial crisis. In the spring of 2014, the US central bank announced that it would stop bond purchases, which occurred in the autumn of 2014. Since then, the central bank has been waiting for the US economy to gain sufficient growth momentum in terms of job creation and wage inflation for it to bear a normalization of interest rates.
In December, the Bank estimated that the time had come to quietly raise interest rates in order to bring monetary policy closer to the state of the economy and thus tackle the expected rise in inflation. In 2016, the expectation is that growth in the US economy will continue at the same level as in 2015. This means that GDP growth will be between 2.5 and 3 percent. Inflation will, after all, begin to rise as the lower unemployment pushes up wages.
All in all, this means that we expect the central bank to raise interest rates at least twice during 2016 in order to balance developments. The launch of this third phase is positive and means that the US central bank, with the expected higher level of interest rates, is expanding its scope for future monetary policy operations.
5. The Danish 10-year government interest rate will increase by approximately 0.5 percentage points
It is the European Central Bank that sovereignly determines the interest rate level for short-term bonds in Europe and thus also Denmark. In December, the ECB announced an interest rate cut on its certificates of deposit by 0.1 percentage point to -0.3 percent. At the same time, the bank extended the buy-back program for European government bonds and thereby stepped up the monetary-policy stimulus program that the bank has been working with since March 2015. The interest rate on short-term bonds – that is, maturities of up to about a few years – is expected to remain low in 2016 and probably longer. The purpose is to kick-start growth in Europe by keeping interested rates low and weakening the euro against primarily US dollars.
The European Central Bank, with its very lenient monetary policy, also wants to create room for inflation to rise to the bank’s long-term target of just under 2 percent. At present, inflation is about 0.5 percent. The interest rate on long-term bonds – that is, with a maturity of ten years or longer – is determined, among other things, by inflation expectations.
When Formuepleje expects the large monetary policy stimulus program from the ECB to raise inflation moderately, the interest rate on long-term government bonds will increase by about 0.5 percentage point.
6. The ECB’s monetary policy stimulus program is further eased
On December 3, 2015, the European Central Bank decided to lower the rate of certificates of deposit to -0.3 and at the same time prolonged the buy-back program of European government bonds by half a year to March 2017. This easing briefly disappointed the market, which sent the shares down and interest rates, which strengthened the euro.
Property management expects a more minor easing of monetary policy in order to further stimulate the European economy and push inflation. In 2015, growth in Europe was estimated at approximately 1.5 percent. In 2016, growth is expected to be slightly higher. The European Central Bank has an increasing number of monetary policy tools it can use. For example, it can further lower interest rates by introducing tranches so that European banks get even more negative interest rates on their deposits over a certain individual level. The bank can also increase the bond purchase program, and it can start acquiring corporate bonds.
7. The separation race between the strong and weak emerging market countries continues
It is becoming increasingly evident that the large group of emerging market countries is becoming increasingly diverse as the countries develop. In the largest emerging market country, China, growth is slowing down as the domestic Chinese economy is increasingly taking on the booming export-driven economy. However, growth is expected to be 4-6 percent, which is high in an international context.
Brazil suffers from negative growth, lack of reforms and corruption scandals. Russia was hit hard financially at the beginning of 2014 when the country annexed part of Ukraine and supported the Russian rebels in the eastern border. The West’s sanctions hurt, and together with the lower oil and commodity prices, the Russian economy is under pressure. In India, the election of Narendra Modi as president in the spring of 2014, the stock market had to flare up in anticipation of reforms following an election campaign that promised “good times”. Although it is a bit slow with the reforms, the Investment Committee has confidence in the process and the political will.
Although there are challenges for emerging markets, there are countries that are expected to perform well. These are, for example, Mexico, India, Indonesia, China, and Vietnam. Therefore, Formuepleje expects that the differences among the strong and weak emerging market countries will increase. It has therefore never been more important to be highly selective in its investments and current pricing allows for long-term optimism.
8. Volatility in global equity markets continues with at least one major stock correction during 2016
We saw it in autumn 2014 when the stock market fell almost 10 percent over the course of a week, and we saw it again in August / September 2015, when Chinese growth concerns sent the stock market down by over 10 percent. Both times, share price falls were triggered by fear and in fact not fundamentally justified by a slowdown in growth in the US, Europe or Japan.
We will also see this in 2016. The source of such a temporary downturn (correction) may well be the changed interest rate policy that the US central bank is expected to implement in 2016. Although the US economy is showing good strength, the financial markets need to recover to rising interest rates, and it can easily give some major blunders in the courses.
Another possible trigger for correction may be the falling oil and metal commodity prices that can cause major financial problems in the oil and commodity-driven emerging market economies such as Russia, Brazil, Venezuela, and others.
9. The geopolitical turmoil is escalated with increased risk for both terrorist actions against Western targets and partly increased turmoil in the Middle East
In 2015, in a cruel way, we saw how the terrorist organization ISIS expanded its territory to parts of Syria despite intensive air bombardments and carried out terrorist attacks in several parts of Europe, including in Paris. All things being equal, it is to be expected that terror and the war on terror will, unfortunately, begin in 2016. This will spread fears in the peoples, but consumers will quickly become accustomed to a higher level of insecurity and, as a result, will not lead to a decline in growth.
The more or less stuck situation in the East Line may find a solution now that Russia has joined the fight against ISIS, but with President Putin at the forefront, the country is not the most predictable partner, so the game of the East Rhine is still open.
Fortunately, it seems that Iran is getting back into the heat after entering into an agreement to reduce its nuclear program. The lifting of sanctions against Iran is both positive for trade with Iran and for the country’s oil exports. All in all, there will still be geopolitical turmoil in many parts of the world that may disturb the financial markets.
10. Credit spreads on High Yield bonds are reduced by about 0.5 percentage points
The current difference between the yields between government bonds and high yield corporate bonds is at its highest level since 2009 and about 6-7 percentage points above government bonds. The very high level of the expected number of bankruptcies does not seem fundamentally justified in all sectors.
The reason is to be found in the low commodity and oil prices that have left some bond issuers with a strained economy. Furthermore, more bankruptcies can be expected with oil-related companies at the current oil price, but this is also reflected in the excess interest rate on energy companies’ bonds. In 2015, there was a large divestment of corporate bonds due to the weak commodity and oil sector, which had a negative impact on the entire segment. There are therefore quite good opportunities to invest in selected attractive corporate bonds in sectors other than energy and materials.
The reason for our assessment of a relatively improved return in 2016 is an expectation of an oil price of over $ 50 (but below $ 60), as the high-yield bonds generally at this level will be positively affected. At the same time, the outlook for the global economy is quite reasonable with good growth in both the US and Europe.