Market experts expect a volatile 2016

Shoppers in a supermarket in Beijing. Mr Manish Singhai of Lazard Asset Management is unperturbed by China's sluggish growth, saying that there is a "gradual but very meaningful move in the composition of the economy" with consumption taking off.
Shoppers in a supermarket in Beijing. Mr Manish Singhai of Lazard Asset Management is unperturbed by China's sluggish growth, saying that there is a "gradual but very meaningful move in the composition of the economy" with consumption taking off. PHOTO: EUROPEAN PRESSPHOTO AGENCY
Mr David Foord.
Mr David Foord.
Mr Kazuhiro Honjo.
Mr Kazuhiro Honjo.
Mr Philippe Jauer.
Mr Philippe Jauer.
Ms Shirin Ismail.
Ms Shirin Ismail.
Mr John Doyle.
Mr John Doyle.

Key factors that will affect market performance are China's growth and impact of interest rate hike

If investors are hoping next year would be a smooth sailing one for the markets, they could be in for an unpleasant surprise.

Some of the top minds in investment and finance here are predicting that 2016 could see further volatility, with equities and bonds potentially seeing sluggish returns.

Chief investment officers (CIOs) of several big investment firms said last week that the answer to how markets could perform next year lies in two key questions.

A LONG, HARD WINTER

I think 2016 is going to be a very difficult year for global investors, with the possibility that all three major asset classes - bonds property and equities - will provide negative returns.

What concerns me the most is deflation, which is lurking in many places despite quantitative easing.

Winter is coming, and it may be a long, hard winter.

MR DAVID FOORD, chief investment officer, Foord Am

U.S. ECONOMY THE KEY FACTOR

One thing that will define 2016 is the US economy. I think the US economy will be the largest factor for the global market throughout the year. Currently, I expect moderate growth will continue, but I feel both upside and downside risks, which should greatly affect the markets. Another thing to look out for... is the Chinese economy. It could have a relatively smaller impact than the US', but it's very important to look at how the transition of China will proceed.

MR KAZUHIRO HONJO, chief investment officer, Tokio Marine Asset Management International

GLOBAL PICKUP

After many years of economic slowdown, massive interventions from central banks, collapse of commodity prices including oil, depreciation of most of the currencies against the US dollar, I believe 2016 will be seen as the year of a global pickup, both in terms of growth and inflation and a slow exit from quantitative easing programmes in Europe and Japan, after the Fed has paved the way for this move. Undervaluation of many emerging currencies or markets should be seen as an opportunity to reinvest in these countries on a long-term horizon.

MR PHILIPPE JAUER, chief investment officer, Amundi Singapore

MORE VOLATILITY

Volatility in large quantum. Information is now spread speedily and widely, hence market reaction can swing the pendulum of sentiment from one extreme end to the other. It is critical to determine whether that new piece of information adds to our knowledge and understanding or it is simply just noise.

MS SHIRIN ISMAIL, head of absolute return investment strategies, Fullerton Fund Management

YEAR OF NORMALISATION

2016 will likely be remembered as a year of "normalisation", referring to both US interest rates and broader macroeconomic rebalancing. We believe 2016 will be constructive for equities as the developed world's expansion gathers traction in both Europe and Japan. However, as the pace of expansion is moderate, we prefer stable growth sectors over cyclical sectors for investment.

MR JOHN DOYLE, chief investment officer, equities and multi-asset, UOB Asset Management

One, will China be able to get a grip on falling growth rates? The other, said CIOs at a roundtable organised by the Investment Management Association of Singapore, is how an interest rate hike could impact economic fundamentals like inflation.

Growth in China is likely to come in just a shade under 7 per cent this year. Next year, some forecasters are tipping Chinese growth to slow to about 6 per cent, the weakest in 17 years.

But Lazard Asset Management managing director for Asian equities, Mr Manish Singhai, remained unconcerned. He said that part of the dislocation in China arises because it is trying to move away from the investment-led growth model.

"What we are seeing in China is a gradual but very meaningful move in the composition of the economy... Consumption has taken off in China. A lot of discretionary items have become staples there. Once you start using diapers, you can't go back to using cloth nappies," he said.

Mr John Doyle, chief investment officer, equities and multi-asset, at UOB Asset Management, said he sees opportunities in China but investors have to "be much more careful".

Another key event that could influence markets in 2016 is the interest rate hike, widely expected to be announced next week by the US Federal Reserve.

Most analysts expect next year's rate hike cycle to be shallow, given the potential backlash of strong dollar appreciation and a weak global economy on US growth and exports.

On this front, the experts believe that asset classes have already priced the rate hike in.

"Corporates that have exposed positions in terms of dollar borrowings have hedged out a lot of the risk. There may be surprises, but we are ready for it," Mr Doyle said.

One surprise is that the rate hike could actually be coming too late, with a surge in inflation something that few people are preparing for, said Ms Shirin Ismail, head of absolute return investment strategies, Fullerton Fund Management.

One region that could remain a bright spark is South-east Asia.

The Asean Economic Community will come into force next year and investment gurus are watching the region very closely. Asean will become a viable alternative over the next five to 10 years, especially as China's export competitiveness wanes, Mr Singhai noted.

Japanese and Chinese investors are recognising this opportunity and seem to be keen on investing in infrastructure projects around the region, he said.

A version of this article appeared in the print edition of The Straits Times on December 14, 2015, with the headline 'Market experts expect a volatile 2016'. Print Edition | Subscribe