2016 – Markets, Economies, Currencies – Where to Next

One of the most significant events of 2015 came late and was well past all expectations in terms of timing. The American Federal Open Market Committee (FOMC) made a Federal Reserve (Fed) base rate revision up by 0.25%. This has sparked mixed reactions and created expectations, both good and bad, around the globe.

BovespaAlthough the rate rise is acknowledged by many as the right thing to do in the USA, this may not be so from the point of view of many other countries, particularly China and other countries with emerging economies. Fear that an ensuing currency war will commence creating havoc amongst some emerging market economies only adding to their slowdowns is emerging.

Looking at it from the US perspective this has been expected for some time. Although markets have been a little jittery in expectation, when the rate was not increased in October it was widely thought that markets had already priced in its possible effects. When it did finally happen there was no dramatic reaction across global bourses.

This increase, the first in nine years and from an all-time low, has been implemented with the intent that the Fed wishes to normalise monetary policy. Inflation target has been set at 2% and some say that the current low inflation rate may be extended because of this rise. However, the Fed have issued assurances that they will closely watch the US economy, particularly the growth and inflation factors.

This is intended to be the first of a series of rate increases, although the Fed has not yet set intervals or projections for future movements. It has said that the series of increases should halt once the rate gets to 3.5%. This will all depend on deflationary pressure and the all-important employment statistics. One analyst said that this increase is necessary in order to give the Fed the opportunity for a decrease once again if required.

Many analysts agree that the action of loosening monetary policy and reducing the base rate to almost zero for nine years played a major part in averting a repeat of the great US depression of the 1930’s. There is certainly room for further economic improvement and this is the Fed’s way of changing policy to encourage this.

2015 has undoubtedly been a very tough year all round when it comes to markets and currencies. Economies have been seen to be recovering but it would be wrong to think that full recovery has taken effect yet. There is still a long way to go for many.

BRIC.svgEmerging economies and their respective markets have suffered a great deal this year. The Shanghai SSE made a spectacular bound of more than 60% only to decline once again almost as sharply when domestic investors saw the castles which were being built on sand around mid-June.

Nevertheless over the year, to 18 December, the Shanghai SSE recorded an overall gain of some 14% whereas the Singapore STI lost the same 14% over the year. This is a wide spread of 28% overall. A substantial gap between two markets which demonstrates the volatility which emerging markets can have.

Russia rallied during the year and was another decliner in September, whilst India showed more of a steady decline. Brazil has been extremely disappointing this year. These three respective emerging market indices declined 7%, 10% and 42%

Turning to western indices the gap was much smaller with the downward trend being rather less dramatic. In a similar period the S&P 500 declined some 3.5% whilst the Dow Jones Industrial Average was also down nearly 5% and the FTSE nearly 8%. After first half year rallies these indices suffered heavy declines in September after which they recovered. However volatility has reared his ever changing face again and created market turbulence during December.

This leaves investors not really knowing what the direction may even be in the coming year. Looking at analytical evaluations and stepping back to a more macro overview we have been in a bull run for some seven years now. Are we heading for a correction? Is the volatility experienced in the markets over the past month a sign that things are changing to a downturn?

There are schools of thought around arguments for both scenarios; market correction and market growth. If you utilise a trend following system it will have just told you or is about to tell you to buy. What action should you take when it does so, do you follow suit and assume that the system will be right again?

Much depends on whether you require access to your investment during the next few years. If there is a major correction and you have started to draw down from your assets for income there will be less time to recover than the investor with a longer term outlook.

FTSE DJIA S&P500 chartIn 2015 the Dow Jones broke the 18,000 barrier. This was a short lived historical record. Analysts say that a sustained level above that point will indicate a further continuing rally. Similarly with the London FTSE briefly pierced 7,000. This magical number has been a sort of trend for a while now. Looking back to December 1999 the FTSE peaked at 6,930 before tumbling. Again in September 2007 in reached 6,721 before crashing down again in 2008. That 7,000 barrier seems to be elusive.

If you require access to your portfolio for income drawdown then it would be sensible to structure and manage it in a different way allocating portions to very short term liquidity, fixed interest for the mid-term and a possible allocation to equities for the longer term. But that is another story.

With so many conflicting views ranging from one extreme to the other, who can accurately predict what will really happen in 2016? It is difficult to know which analyst to follow or even believe. They all have such credible stories, theories and convictions. Maybe some investors might want to go and see their fortune tellers as an alternative.

Questions to the author can be directed to PFS International on 02 653 1971 or email enquiriesthailand@pfsinternational.co.th

Andrew Wood has been an expat in Asia for 35 years and is Executive Director with PFS International Consultants Co. Ltd.. He has been writing Net Worth articles for eight years and has made a significant contribution to the PFS library of financial service articles dating back over eleven years. These articles which cover the complete A-Z of financial planning are available to readers on request.


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