Growth in global economies during 2015 has been quite a disappointment given high hopes for an acceleration on the back of massive monetary stimulus throughout the year.
The US has stuttered and stalled, but largely continued on its moderate recovery. Meanwhile it is hard to ascertain much success from the quantitative easing programmes undertaken by the Eurozone and Japan. One is experiencing anaemic and slowing growth and the other is currently flirting with their fifth recession in seven years. Global trade volumes are weak and over-capacity across manufacturing industries and commodity producers means that the outlook for inflation remains extraordinarily weak.
Against this backdrop, 2016 has begun in awful fashion. Chinese concerns have led to a 1 per cent drop in their local market as the economy slows and officials continue to insist on intervention which does nothing but further unsettle already nervous investors. Unfortunately these concerns have also led to contagion across global financial markets with the US suffering its worst start to the year ever and Europe performing even worse.
Commodities have continued to decline as huge supply/demand imbalances persist into 2016, with oil hitting 12 year lows. Despite the Fed having already begun to raise rates, US 10 year yields have actually come in 20bp as investors seek a safe haven.
It appears that the outlook for equities in 2016 is rather bleak. But ignoring the usual, although admittedly slightly more extreme, January volatility, what is really ahead of us over the coming year?
It is almost certain that the US will continue to tighten monetary policy throughout the year, particularly after an extremely strong non-farm payroll number to end 2015. Elsewhere, expect even further efforts to ease monetary conditions as growth continues to falter.
While wage growth and inflation might be subdued even in the US, their job market is undoubtedly strong and will surely at some point tighten sufficiently to drive wages higher. Full employment in the US will prompt the Fed to slowly raise rates over the year.
Hard pressed financials that have struggled to generate acceptable returns in a zero interest rate environment will breathe a huge sigh of relief. Higher interest rates and growing demand for loans from firms and individuals should result in better earnings momentum. Sector valuations in both banking and life insurance remain attractive and with a clearer path to higher returns, those companies trading below or around book value, such as AIG, Metlife, Bank of America and Fifth Third Bancorp should experience a re-rating.
Elsewhere, companies and sectors that have displayed an ability to grow and flourish despite the difficult economic environment should continue to be rewarded. Technology leads the way in growth terms, and the shift to wireless devices will continue regardless of the wider economy. Those businesses that are tapped into this secular trend should continue to see strong sales and earnings growth.
Healthcare remains a sector with very attractive long-term growth dynamics as the population ages and becomes heavier. However, 2016 may be a more difficult year due to aggressive drug pricing becoming a major point of focus during the US presidential race. While unlikely to result in any actual sanctions against the industry, constant negative headlines may continue to weigh on valuations over the year.
Overall the outlook for markets is more difficult, as weak growth and rising US interest rates will probably be balanced by continued monetary easing elsewhere. A strategy of focusing on high-quality, attractively-valued companies that have displayed an ability to grow regardless of the wider economic environment should continue to perform well.
Jake Robbins is fund manager of the Premier Global Alpha Growth Fund.