21st December 2015 at 2:21pm
Andrew Milligan advises Standard Life Investments’ Chief Executive Officer and senior fund management team with economic and market analysis.
2016 investment outlook
At this time of year I get a lot of people asking me what will happen in 2016.
Will interest rates go up?
Will markets be volatile?
Should I review my investments?
Here are my answers to the questions many of you are asking.
The level of uncertainty at the moment in markets means it’s crucial you review your investments
What will be the key drivers of investment markets in 2016?
Many of the drivers that affected markets in 2015 will almost certainly remain the focus for 2016. Lots of these will be political – a US presidential election and, of course, the European ‘in-out’ referendum in the UK.
Investors will also remain concerned with world tension – current tension in the Middle East, including Syria, has the capacity to rapidly escalate and cause significant volatility in financial markets.
Economic health will also have an impact.
Whether stock markets move significantly higher in 2016 will in part depend on the strength of the global economic recovery.
The value of shares needs to be supported by significant sales growth and companies maintaining current profit margins.
Is there anything that could surprise markets?
Unexpected events which would impact financial markets are varied.
Following the recent US rise in interest rates, subsequent decisions to increase further, either more rapidly or by a greater amount than expected, would be negative for markets.
The current rock bottom oil price is helping to hold interest rates down as a low oil price leads to low global inflation.
Any supply disruption – such as an escalation of the terrible troubles in the Middle East – could cause an unexpected spike in oil prices and subsequent inflationary pressure.
If this happens, global interest rates could rise far faster than expected and unsettle markets.
China is increasingly having an impact on markets and any further slowdown there would certainly be negative.
What will happen to UK interest rates?
With the US set firmly on the path to progressively higher interest rates, the Bank of England will now almost certainly follow.
Almost 10 years since the UK last raised interest rates, many think a rise is overdue.
Slow economic growth and low inflation has allowed the UK to hold back raising interest rates for this extended period. At some point, however, they will have to start increasing.
But the Bank of England will be cautious with both the timing and speed. The UK recovery is fragile with low wage growth, which means that policymakers will be anxious households aren’t placed under more financial pressure.
While rate rises are modest and gradual, markets will not adversely react – they all know rates are only going one way.
What will happen to US interest rates?
US Federal Reserve increased rates in December by 0.25%
As expected, the US Federal Reserve increased rates in December by 0.25%. The Fed Chair, Janet Yellen, indicated there were likely to be further modest rises throughout 2016. Importantly, she noted rises were not automatic, and would strongly depend on the pace of the US economic recovery.
As with the UK, the US economic recovery has been below the normal pattern we’ve seen in other recessions and subsequent recoveries.
The US is likely to be very cautious in increasing rates quickly – they have been, and will remain, cautious in their policy stance. If US rate rises are modest, occurring over an extended period of time, markets should take future rises in their stride.
Should I review my investments?
The level of uncertainty at the moment in markets means it’s crucial you review your investments.
The most important thing is to make sure your investments are diversified.
This should ensure a degree of protection if any of the possible ‘surprises’ mentioned earlier do occur.
If your investment portfolio’s main aim is to generate income, it’s important to consider how sustainable dividend payments from holdings are.
Although these payments are attractive at the moment, if there’s an economic downturn, corporate profits will come under pressure – and dividends may come under threat.
As always, I urge investors not to be tempted to invest in the latest fashion or fad.
Know exactly what you want to achieve (long term capital growth, a dependable income stream, for example) and ask yourself, truthfully, how much risk and volatility in your investments you are actually willing to tolerate.
Are you making any major changes to your Standard Life Investment funds?
During 2015 we have been steadily lowering the levels of risk within Standard Life Investments multi-asset funds.
We are concerned about the slowdown in company profits growth and the continued sluggish global economic recovery. Our view is that markets will likely remain volatile during 2016.
Specifically within different asset classes and regions, the only stock market we are positive about is Europe, which is supported by positive profits growth and a weak currency.
We are cautious on the prospects for global government bonds. Investors need to remain highly selective in their investments in 2016 and be aware that further turbulence is likely.
The views expressed by Andrew in this blog should not be regarded as financial advice. You should speak to a financial adviser if you are in any doubt about your investment options. There may be a charge for this.
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The value of an investment can go up or down and may be worth less than was paid in.
The information in this blog or any response to comments should not be regarded as financial advice and is based on our understanding in December 2015.