11th December 2015
Four Elite Rated fund managers, from Jupiter Asset Management, give their views on the outlook for their markets in 2016:
John Chatfeild-Roberts, manager of the Jupiter Merlin range:
The year ahead looks promising for global growth, but the problem of rebalancing the Chinese economy and handling growing policy divergence on interest rates could create choppy waters. Against this background, we believe equities remain the asset class of choice, with selective areas of the bond market offering positive returns.
The developed world is likely to drive much of the pick-up in economic growth we will see in 2016, boosted by cheaper commodities such as oil. The price of a barrel of oil is likely to stay lower for longer and there is a chance it could stay below $40, having just fallen again in the past few days. Forecasting commodity prices is a perilous occupation, but cheap oil is really good news.
While lower commodity prices are supportive of global growth, the pace of growth among countries is uneven, leading to central banks around the world adopting increasingly divergent policies on interest rates. In the US or UK, where growth is stronger, it is likely that rates will go up at some point. We are agnostic about timing, but we have no reason to doubt Mark Carney when he says 2.5% should be the new norm for UK interest rates. In countries where economic growth is anaemic or running out of steam, we expect to see further rate falls. China, for instance, has already cut rates six times in the past year and is likely to do so again in 2016.
Talk of interest rate rises might let us forget there are some regions where central banks are still carrying out the bond purchasing programmes we know as quantitative easing (QE). In March this year the European Central Bank (ECB) launched its own €60bn a month QE programme to stimulate economic growth. It has resulted in a modest pick-up in growth, but the overall rate has been lower than hoped, which in December prompted ECB President Mario Draghi to pledge to continue the programme until March 2017 “or beyond” in a bid to tackle weak growth and lift inflation. The question now remains whether these measures will achieve the desired result, when you consider the euro zone up to now has only been able to produce the weakest of growth, despite enjoying what has essentially been ‘free’ money, subdued energy prices, low inflation and a massive injection of cash from its central bank. It would be wrong to consider the eurozone a write-off; however, it is merely better in our view to approach it on a selective basis.
Ariel Bezalel, manager of the Jupiter Strategic Bond fund:
For some time, commentators have been itching to call the top of the great bond bull market. They point to improving economic conditions in the developed economies, a tightening US labour market and a long-awaited normalisation of interest rate policy after many years of extraordinary stimulus as evidence for their case. It has also been suggested that bonds have simply entered a bubble which, like all bubbles, must eventually burst.
Far from being at the start of a great normalisation, we believe that interest rates are likely to remain low for a long time. We think the ability of global central banks to raise rates will be limited in an environment where high debt levels and ageing populations in much of the developed world continue to act as impediments to economic growth. The development of new, disruptive technologies represents another headwind to global inflation. In this context, we expect any tightening of global monetary conditions to be gradual.
In the short term, we worry that the risk of a policy error by the US Federal Reserve (Fed) has increased. In some ways, it seems that the Fed is looking to atone for its failure to begin normalizing monetary policy earlier in the cycle, before the imbalances in the global financial system became so pronounced. That window has now closed, and in our view the Fed may come to regret a move to raise rates in December, particularly given that the slowdown in global trade now appears to be affecting US manufacturing. In our opinion, this US economic recovery is built on shaky foundations. In challenging economic conditions, we think governments with sound finances and control over their printing presses should provide an effective hedge against further deflationary shocks.
Steve Davies, manager of the Jupiter UK Growth fund:
There are four key issues for UK investors in 2016: the impending turn in the interest rate cycle in the US and potentially in the UK; oil prices staying lower for longer; consumers doing relatively well while industrials struggle and the wildcard of an EU referendum.
Investors have not had to worry about rising interest rates for a very long time, but we are now reaching a point where the US Federal Reserve (Fed) cannot postpone a hike much longer. Once that arrives, all the attention will turn to when the next one will come and the debate will change dramatically. In a rising rate environment, I would expect the ‘bond proxy’ sectors, such as staples and utilities, to struggle (the former look particularly overvalued to me), while banks and insurance companies should benefit – I believe my strategy is currently well positioned for such an outcome. Markets currently expect the Bank of England to be a long way behind the Fed – I think they may be in for a surprise as my view is that the UK domestic economy is just as strong as the US.
The oil price has fallen sharply in 2015 and I expect it to remain stuck in a range of $40-$60 for some time to come. In this environment, the oil majors will continue to struggle as their cashflows wither. By contrast, the travel industry should start to see real benefits as their hedging programmes run off and lower oil prices are either passed on to consumers or benefit their bottom lines. Life is likely to remain tough for mining and industrial companies, as capex budgets reduce further and the risk of further weakness in China persists, particularly if the dollar continues to strengthen.
Consumer spending in the UK should remain robust. Wages continue to rise as the labour market tightens (the living wage should start to have a positive impact from April 2016) and inflation remains subdued. The key as always in this sector is to separate the winners from the structurally challenged. Food retail, for example, is likely to remain firmly in the latter camp. The fly in the ointment could come from the EU referendum. It is too early to form a strong view on either timing or outcome – investors will have to treat this “known unknown” much as they did the general election this year.
Cédric de Fonclare, manager of the Jupiter European Special Situations fund:
In Europe, the economic environment has provided a favourable but fragile foundation for companies. There has been moderate economic growth, and leading indicators like credit growth and consumer confidence have continued to improve from a low base. Historical valuations look reasonable compared with those in other markets. Unlike in the US, earnings have yet to catch up with their 2007 peak. Taken in isolation, the outlook for Europe is good in my view. Unfortunately, Europe is not immune to what happens in the rest of the world.
Global economic growth continues to disappoint and emerging markets are looking particularly weak. The evolution of the Chinese economy from a high-growth, export-driven developing nation to one more dependent on internal consumption has not been – and will not be – easy. The days of China making huge infrastructure investments with little thought given to the cost of capital may soon be numbered. This will weigh on many European companies, especially industrials and commodity-related businesses.
These risks are there for all to see. In recent years, investors in European equities have been favouring high-growth, high-yielding, defensive stocks. For instance, some sectors, like food & beverages have massively rerated, in some cases even as growth has slowed. This, in our view, means that stocks that would perhaps have been considered low risk in the past are now anything but.
As stock-pickers, we think the way to do well in this environment is to be selective. We aim to pay little or no premium to the market for a portfolio of companies with strong balance sheets and a proven track record of consistently delivering strong cash flows. Nobody can predict what the future will hold, but we believe that by sticking with a process that has served us well through a variety of different markets for more than a decade, we should be able to continue to add value for our clients.
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. The managers' views are their own and do not constitute financial advice.
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