[Estimated time to read: 5 minutes]
Predicting the future is easy.
At this time of year everyone’s at it.
But getting it right is much harder. We can’t see into the fut
ure – but we can point at four major issues that will shape your returns this year…
Offering “concrete” predictions for the coming year is about as helpful as a chocolate teapot.
So, rather than making guesstimates about the year ahead, we’re going to look at four major, current themes and why they are likely to remain important.
Understanding these is imperative to getting your portfolio right for 2016 and beyond.
Oil prices
The first stop is oil.
The huge slump in the price of oil was arguably the biggest financial “event” of 2015. It began falling in 2014, but 2015 was when it nosedived.
Oil prices impact the cost of goods, services, food, transport – almost every aspect of our lives is in some way touched by the price of oil.
For many – particularly consumers in oil importing countries like Europe and Asia – low oil prices mean more money to spend and so have a largely positive influence – supporting consumption and growth in the wider economies.
However, for oil producing companies and countries, the impact is negative. Low prices put a strain on government budgets, cause unemployment and squeeze growth. A good case study is Saudi Arabia which last week reported a budget deficit of $98bn.
With supply outstripping demand, downward pressure on the price of oil is inevitable.
When viewed from a global perspective, the price of oil should be a zero-sum game. Some economies win and some lose. Thinking about oil’s influence is useful when constructing or changing a portfolio to ensure proper diversification.
Emerging markets
2015 was terrible for many emerging markets.
As major exporters of commodities (which includes raw materials and agricultural foods) and oil, falling prices hit their economies badly.
The reasons why commodity prices fell are varied, but one of the major causes is a continuing slowdown in demand from China (which we will come to next).
One of the hardest hit areas was Latin America, with Brazil, Argentina and OPEC-member Venezuela all facing major recessions this year.
There is an argument that these markets will hit a bottom in 2016 – but that is a guesstimate and therefore something we’re going to avoid!
For now, just know these economies are in trouble, but that, in the long term, they are likely to bounce back as new market cycles begin.
As a long term investor – there may be a compelling case to invest in these markets now. Even if they continue to fall this year and even next, the likelihood is that they will begin to pick up at some point. This could be a chance to buy cheap.
China
China looms large on the world stage.
Its impact has already been felt this year. On Monday Chinese shares slumped by 7%, leading to falls on other stock markets around the world.
This shaky start is not surprising. The issue of slowing Chinese growth first raised its head last year, with a summer sell-off eventually ending with so-called “Black Monday”.
In all likelihood, fears over a “slowing Chinese economy” will dominate headlines at some point again this year and maybe next, but it should be viewed in context.
Chinese growth is slowing, but it is still much higher than in most other economies. One could say it is normalising.
China’s leaders are implementing huge measures to rotate the country from a heavily manufacturing and industry-led economy, to one with services at its forefront.
This rotation will naturally mean a slowdown in sectors of the economy which in the past pushed China into delivering annual double-digit growth.
This contributes to the dampening effect on commodity and oil prices and therefore on the economies of many emerging markets.
However, this story will eventually play out – the question you need to ask yourself is whether you believe in the long term growth of China?
If you do, then the short term fluctuations in the levels of growth and the dizzying pogoing of the Chinese stock markets should be of little concern.
But don’t forget the US is still a dominant player…
As the world’s largest economy, the United States still dominates the world stage – and so what happens there has multiple and varied repercussions.
In the twilight of 2015, the US Federal Reserve finally increased bank interest rates and said it would continue to do so this year – as long as certain economic indicators were good.
First off, this is good news. The fact the Fed believed it could begin increasing rates for the first time since 2006, signals that it has some confidence in the US economy.
However, this is definitely a “watch this space” scenario. Some have suggested the rate rise has only been made to give the US central bank some leeway should its economy begin hitting the rocks again.
There are also concerns about what impact a rate rise will have on other economies whose currencies are pegged to the dollar. If debt becomes more expensive, how will companies and consumers cope?
This is an unknown. The increase made in December was small – it is further rate rises which may have more of an impact. But we will have to wait and see whether these happen. Expect close scrutiny of all US data in the coming weeks and months.
Many other major events this year could rock the boat at some point.
An election is looming in the US, while in the UK David Cameron is preparing to renegotiate membership terms with the EU – his failure to satisfy EU critics at home could even lead to a British exit from the Union.
Tensions remain between Russia and its neighbours, while terrorist attacks are a constant threat. China’s expansionist actions in the South China Sea are also making waves…
One thing we can say with some confidence is that 2016 will deliver events which markets have not foreseen. But overall, there are reasons for long term investors to be positive and to continue to invest.
Observe the big picture and make considered adjustments if necessary, but don’t get caught up in the moment – that’s when mistakes are made. Happy New Year and happy investing!
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