6th January 2016
Equities are expected to struggle in the first quarter of the year as 2016 throws up similar problems that investors faced last year.
Many of the themes and dynamics that dominated 2015 are set to be repeated over the next 12 months, including the next US Federal Reserve rate rise, high equity prices and concerns over the effect of wage rises on company profit margins.
Oliver Wallin, investment director at Octopus, said central banks outside of the US are trying to stimulate economic growth, especially in Europe and Japan, and China is continuing to manage its slowdown.
He believes ‘commodities prices will continue to struggle and this will affect emerging markets, which are likely to suffer as a result of a strengthening dollar’. Although consumers and certain companies will benefit if the oil price continues to sit at historic lows, it will create difficulties for the economies of oil exporting countries, oil companies and stockmarkets, such as the FTSE 100 in which they dominate.
‘Equities and other investments are likely to struggle in the first quarter while the market builds confidence, but with prospects improving in the latter part of the year,’ said Wallin.
‘Plenty of attention will be paid to economic news as investors seek evidence of growth. In this rather brittle environment, investors could prove skittish if they don’t find what they’re looking for in the economic numbers. However, we also believe that evidence of economic growth will come through eventually.’
He added that it is ‘possible that investor enthusiasm and over-optimism may bring some early positive activity’ but it was more likely that ‘investors will wait until later in the year’.
The Fed will remain in the spotlight, said Wallin as its actions will be ‘crucial’.
‘At the moment, the Fed’s views and those of the market do not seem to be fully aligned,’ he said.
‘The market is giving the Fed the benefit of the doubt, but will punish any policy error on raising interest rates. The Fed has done pretty well to date, but will need to concentrate on delivering a positive message throughout the year. We expect the rate rise path to be gradual, but believe there is enough evidence for another increase or two before the year is up. We will see which way the UK is pulled towards the end of 2016. We expect rates in Europe to remain at around zero for some time.’
It is not just interest rates that investors need to watch, but the political environment.
‘Europe is on an expansionary economic path, with European Central Bank president Mario Draghi at the helm. This should help markets,’ said Wallin. ‘But politics has the potential to derail plans. The problems in Greece have not gone away and may well raise their heads early on. Meanwhile, we watch with interest as the political landscape changes in Spain and in peripheral countries, such as Finland.
‘Election year in the US will bring its own distractions in the last quarter of 2016. There is a perception that the US stock market tends to offer above-average returns in an election year. We will see whether that premise holds in 2016.’