In the run up to Christmas I will be laying out my expectations for markets in 2016. I will set out my thoughts on Indices, Forex and Commodities in a series of posts over the coming days and today I will begin by concentrating on equity indices. The issues I need to cover include the following. What will be the driving forces for stock markets in the coming year? What surprises could be in store? What are my expectations for where stock markets are headed next year?
As 2015 comes to a close the negative impact of the falling oil price and concerns over the legacy of a Fed rate hike are causing investors to think twice about moving back into equities. 2015 was a tough year and unfortunately I do not see it getting any easier next year. volatility seen in the DAX meant that the index swung from huge gains to huge losses with a traded range of 9307 to 12390 which is around a 25% swing. There is little suggestion of an easier rise next year.
The Federal Reserve may be about to tighten monetary policy for the first time since 2006 which should theoretically be a confidence booster, but I am not convinced. Regional Fed surveys continue to flash at least amber warning lights over the concerns of future growth. Furthermore, the US 10 year yield is also not matching the conviction of the 2 year yield and again questions how positive the market is over the longer term. This could be a budge for the Fed to tighten on a shallow path of rate hikes. Currently expectations are for perhaps three or maybe four rate hikes in 2016, however a dovish Fed could mean fewer, and what are the chances of “one and done”? The impact on equities from a tightening Fed is difficult to ascertain and could depend upon the speed of the hikes, however I expect the S&P 500 will not be the outperformer of the year. The drive higher of the S&P over the past few years has been much down to the huge volume of share buybacks. In an environment of more expensive debt, can this continue?
I expect the Eurozone equities should ultimately be the better performers next year. The ECB remains easy in its monetary policy stance (if not as easy as the market had previously thought), whilst coupled with the fact that the region is a big oil importer, the tax cut that comes with oil halving in the past year will have knock on benefits to the region, as will the far more competitive level of the euro. This means that the German DAX and French CAC are likely to be strong picks.
What is not a strong pick will be the perennial bridesmaid that is the FTSE 100. Weighed down by constant weakness in commodity prices with oil and metals (sectors constituting over 21% of the market) spiraling ever lower, the UK will underperform. Also the weighting of the banks and financials (again around 21%) is also a drag with the difficult regulatory and scandals showing little sign of going away. So I expect the Footsie to also underperform.
The issue is that it now looks as though markets will begin 2016 on the back foot. Big technical breakdowns on indices have been seen that could mean early bear pressure which could even mean a trip back towards the August/September lows. I am specifically looking at the FTSE 100, the CAC 40 and the Spanish IBEX. The DAX is also weak having broken its key November low. Having said all that though, i see these market moves as medium term as I think that the oil price will be choppy all year and the loose policy of the ECB will also be supportive for corporates.
My shocks list will not be outlandish and I am not looking to win any awards for bravery of calls. Instead my shocks are more a list of “known unknowns” which are effectively already identifiable but could easily crop up again.
A year is a long time in the markets and I am no fan of providing targets of where markets will be by this date or that date. However for my job it is a necessary evil, so here goes.
I am generally fairly neutral on equities for the year ahead. The oil price will continue to be a driver of sentiment near to medium term and therefore with fundamentals showing little sign of improving it could be a struggle for equities to perform. The easier policy of the ECB is balanced by a tightening Fed and this leaves me fairly neutral on equities as an asset class. I do not believe that the bottom is about to fall out of the market but equally I foresee another difficult year ahead. Above all it is my expectation that the volatility will continue next year. That may sound like an obvious comment but the volatility around the divergence in central bank monetary policy will not only impact on forex and bond markets but also subsequently on stock markets too.