With 2015 nearing an end, the focus is turning to 2016. Research reports are now flooding in, offering views on what to expect in the year ahead.
The latest note to hit our inbox comes from Goldman Sachs. Entitled GOAL, standing for global opportunity asset locator, it is an extensive document full of statistics, forecasts and figures evaluating the macroeconomic backdrop, key themes, likely asset price performance and risks for 2016.
Goldman expects that global economic growth will accelerate in the year ahead, rising to 3.5% from 3.2% in 2015 on the back of “stabilisation of hard-hit EM economies and a small acceleration in Europe and Japan”.
For the US, still the world’s largest economy, growth is predicted to slow to 2.3% from 2.5%. China, closing in on top spot despite roiling markets for much of 2015, the bank expects growth will slow to 6.4%, down on the 6.9% level likely to be achieved this year.
Perhaps explaining why US growth is tipped to slow, Goldman note that “strong labor market data increased our confidence in a Fed lift-off on December 16”. They look for the Fed to hike interest rates by 75-100 basis points in 2016, before delivering a further 100 basis points of tightening in 2017.
“The market discounts a less steep Fed Funds rate path,” analysts at the bank note. “We believe the BOE will follow closely and raise rates in Q2 2016.”
Pointing to significant monetary policy divergence, they tip the European Central Bank and Bank of Japan to loosen monetary policy further in the new year. They also predict that the People’s Bank in China will deliver two additional interest rate cuts, along with an additional 300 basis point reduction to the bank’s reserve ratio requirement. The renminbi is also tipped to weaken to 6.6 to the US dollar, higher than the current level of 6.4371.
As for the likely performance of asset classes, there’s good news for equity bulls. Despite “late-cycle concerns with elevated valuations and limited earnings growth potential in most developed markets”, they remain overweight stocks and corporate bonds in the year ahead, preferring “non-US markets since the US is already in the ‘Optimism’ phase”.
“We have a pro-risk asset allocation over 12 months, but see a flattening return trajectory and more risks,” note analysts.
The chart below reveals the bank’s expected equity market returns, comparing Japan, Europe, the US and Asia Pacific ex-Japan. Clearly Goldman likes the look of Japanese stocks in 2016.
In contrast to stocks and credit, they suggest being underweight bonds and commodities, the latter mainly “due to downside for oil”.
As for risks in the year ahead, Goldman identify three: a breakdown of the correlation between bonds and equities, further weakness in crude oil and weakness in China’s economy.
“We are in one of the longest periods of positive equity/bond yield correlations since 1870,” note analysts.
“A pickup in inflation and monetary policy uncertainty can drive rate shocks and less stable bond/equity correlations.”
On crude, they believe “there are high risks near term that the supply adjustment proves too slow as inventories continue to build and storage utilization nears high levels in the face of a mild winter, slowing EM growth and a potential lift of international sanctions on Iran”.
Should surpluses breach current capacity, they see the risk of oil prices reaching just $20 a barrel.
Finally, in what many would deem to be simply a continuation of the pattern seen in 2015, Goldman suggest “growth and policy concerns are likely to continue in 2016″, suggesting that a Sharp dollar appreciation and decelerating growth in China can increase pressure for another CNY devaluation”.
So there you have it. The outlook for the economy, markets and monetary policy in 2016. It’s sure to create debate — forecasts always do — but if there’s one thing the markets like to do it’s to listen to Goldman’s view, be it to love it or loathe it.
As the other major investment houses release their views, it will be interesting to see whether they correlate, or contradict, with the banks view.
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