Investment Perspectives, January 2016

Global GDP growth for 2015 once again failed to match up to early-year expectations. EM was a weak spot, with severe recessions observed in Brazil and Russia, while concerns over the slowdown in China affected the rest of Asia. U.S. GDP growth was well below the average January forecast of 3%, especially due to a weak first quarter. In contrast, the Eurozone fared well despite the Greek debt crisis, the slowdown of China and the ongoing tensions with Russia over Ukraine.

It turned out to be a very tumultuous year for financial markets. Commodities were under severe pressure for most of the year, mainly due to oversupply, high inventory levels and weaker demand. EM assets also performed poorly on the back of investor outflows and the prospect of higher US interest rates. European and Japanese equities fared the best, in local currency terms, mainly as the result of ultra-accommodative monetary policies. The dollar appreciated against all currencies, reflecting the relative strength of the US economy and the anticipation of higher interest rates, which were finally raised by the Federal Reserve during its last meeting of the year; this decision had been widely expected and was welcomed by the markets.

2016 global economic growth is expected to improve slightly, as the recovery in Europe gathers more momentum and as global emerging markets should do a little better, in particular due to less severe recessions in Brazil and Russia and a stabilization of China. The main central banks remain in accommodative mode, even if the Fed has started to hike rates. Some of the main risks for 2016 include an extension of the rout of commodities, especially oil, political issues such as Brexit, the rise of populism in Europe and US Presidential elections as well as geopolitical threats including instability in the Middle East and a deterioration of relations between NATO countries and Russia.

Throughout 2015, we gradually shifted the portfolios towards more flexible strategies, including non-benchmarked fixed-income funds, long/short equities and global macro. We increased our exposure to convertible bonds and also reinitiated an investment into US high-yield. We consistently remained very underweight EM assets and commodities, while being positively biased towards the dollar and DM equities.

For 2016, we remain positive on equities relative to high-grade bonds and maintain our overweight in developed markets equities over emerging markets. Our assessment is that European equities should benefit from the region’s economic recovery, reasonable valuations and the support of the European Central Bank’s policies. Our search for yield focuses on European loans and high-yield as well as investment-grade sovereign debt outside of Europe; we also believe that convertible bonds should perform well in the current market conditions and help to limit portfolio volatility.

Our view on the dollar remains positive, in particular against EM currencies, but also compared to the euro, whose value should continue to be impacted by the very accommodative policy of the ECB. Gold will have to face headwinds, including an appreciating dollar and higher US interest rates, but its role as a hedge could prove to be useful during periods of stress on other financial assets. 

EXECUTIVE SUMMARY

  • 2015: REVIEW OF OUR INVESTMENT THEMES
  • 2015: ECONOMIC DEVELOPMENTS
  • 2015: THE FINANCIAL MARKETS
    • Equities
    • Commodities
    • Debt instruments, currencies
    • Hedge funds
  • 2016: ECONOMIC OUTLOOK
  • 2016: FINANCIAL MARKETS’ OUTLOOK
  • 2016: ASSET ALLOCATION
    • Debt instruments
    • Equities
    • Commodities
    • Gold
    • Hedge funds
    • FFG portfolio construction
    • Hedge fund managers/structured products
    • Asset allocation grid

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Tags: Investment outlook