4th January 2016
Darius McDermott, Managing Director
Six reasons why 2016 could be another volatile year for investments
2015 wasn't a great year for investments. Despite the UK stock markets hitting an all-time high in April, the FTSE 100 ended the year almost flat. Other develop markets fared a bit better, but emerging markets continued their downward path, losing almost 10%. Bonds, on average, made nothing either*. Can we expect a better 2016? Personally I'm quite cautious and think the year could be just as volatile. In no particular order, here are six reasons why:
1. Interest rate rises have begun in the US – while markets generally took in their stride the first interest rates rise in the US for almost a decade, they don't like the unknown and that is what we face with the normalisation of monetary policy'. It's the frequency and velocity of any further rises, which are now all-important. The UK may well follow suit later in the year.
2. There are still question marks over China, which has started a currency war in its battle to keep economic growth alive. Gradual depreciation of the Renminbi is already putting deflationary pressure on the West. Closer to home, any problems in China have a knock-on effect across Asia and, with the Chinese stock market falling 7%, and trading automatically suspended already in 2016, the outlook isn't great.
3. The first two issues mean emerging markets are likely to continue to struggle. Whilst a lot of them were, no doubt, experiencing 'Fed Fatigue' and are rumoured to have urged the US to get on with a rate rise at the last G20 summit, a turnaround doesn't look imminent. The risk of emerging economies being downgraded, and defaults increasing, may continue for some time.
4. With emerging markets still in the doldrums and growth in the developed world muted at best, demand for commodities is also likely to be limited, keeping pressure on prices. Earlier in the year, Neptune went as far as saying that oil prices could stay this low for a decade or more.
5. The 'Greek problem' hasn't gone away – it's just been superseded by other matters in the headlines. It looks like there could be just as much uncertainty in Spain now, following an inconclusive election and the likelihood of another having to be called. Super Mario still needs to do 'whatever it takes' to sort out Europe and market expectations (and therefore the risk of disappointment) are high.
6. Finally, there's politics and a few important events. As mentioned, the Spanish may have to go back to the polls. The political scandal in Brazil may force the same. The big one is in the US in November and it is possible that the UK's referendum on Europe could come early - 15th September as suggested by an industry peer a few weeks ago! Let's not forget all the problems in the Middle East, either.
With so much uncertainty it is unlikely we'll see markets go up in a nice steady straight line! However, with volatility comes opportunity and it will be possible to make money. For the more risk-averse investor, targeted absolute return funds may be worth a look. They can add a good level of diversification to a wider portfolio and the good ones have achieved their stated aims. It's a very diverse sector, so you need to look closely at each fund before investing.
*Source: FE Analytics, total returns in sterling, from 1st January 2015 to 30th December 2015.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.
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