Jo’burg: Bags of Potential, Needs Help
1 January, 2016
New Kids of Finance Start Playing with the Grown-Ups
6 January, 2016However, US rates are of course only part of a much more complicated picture. Just as in 2015, the oil price (and that of other commodities) will also impact the outlook for global growth. After the OPEC meeting made no effort to reduce supply – and in fact abandoned the idea of a ceiling on growth at all – it seems likely that oil prices will remain depressed for the foreseeable future, particularly since Iran is likely to re-enter the global oil market once some sanctions are removed, probably in early 2016.
Geopolitics will of course be as relevant in 2016 as in 2015, and events in the Middle East – particularly around Syria, Iraq, and efforts to deal with the ISIS threat – will be crucial. “The only certainty in 2016, in other words, is more uncertainty,” says Bruton. “While this creates risks it also generates opportunities for active, research-driven investors.”
And, as in 2015, the outlook for China will continue to have an impact on both the developed and emerging world in 2016. Analysts agree that Chinese growth is slowing down, but not all are negative about the future. Catherine Yeung, head of Asia ex-Japan equities at Fidelity, for example, believes that Xi Jinping could be the sort of leader who brings about a major improvement in the country’s long-term direction.
“He is different from his predecessors,” she says. “His aim is for China once again to become a superpower. Year to date, it almost appears that the middle layer of decision-making in the government has been removed. All the decisions are being accumulated at the top. That should enable him to implement a reform agenda.”
Increasingly, fund managers see China in a more nuanced way than just looking at the overall economy. They see that growth indicators tend to be based on investment and heavy industry, rather than consumption. “We think in terms of old and new China, with consumption and services representing the new China,” says Stuart Rae, chief investment officer for Asia Pacific ex-Japan equities at Alliance Bernstein. “Growth in these areas remains solid, and we continue to see opportunities in companies involved in the internet and education.” That said, China is not Rae’s biggest allocation in Asia: that, today, is South Korea.
Even if we now understand how the Federal Reserve sees the world, the US still promises one considerable uncertainty in 2016: its presidential election. This will cause ructions right up until its conclusion in November, particularly if Donald Trump takes the Republican nomination and continues to say inflammatory things.
In the meantime, we can expect a strong dollar through at least the start of 2016. “A stronger dollar will continue to impact upon emerging markets, although I believe that more of this is priced in than anticipated,” says Marc Norden, head of asset management at Bank of London and the Middle East. That’s not all bad, though: as emerging market borrowing costs will increase in dollar terms, they are likely to favour local currency debt markets, a healthy development. But those markets are not bottomless, and it is likely that countries with weaker balance sheets are going to struggle to raise or refinance debt.
Naturally, not all emerging markets are the same. At Eastspring Investments, part of the Prudential group, Ooi Boon Peng, chief investment officer for fixed income, notes that there are three different groups of emerging markets, with different prospects.
Some, like China, South Korea, Singapore and Thailand, have high debt levels but also high FX reserves, balance of payment surpluses, fiscal stability and sound banking systems. Others, like India, the Philippines, Indonesia, Mexico and Poland, differ in that their debt levels are lower and their FX reserves perhaps only adequate, but share the other strong attributes. The third camp is the problem: high debt levels, lower FX reserves, balance of payment deficits, fiscal issues, and a weak banking system. This group includes Russia, Turkey, South Africa and Malaysia. These are the sort of countries, along with Brazil, that investors may need to worry about in 2016.
“We have taken a cautious view of the emerging market debt asset class on concerns about the strength of the US dollar and perceptions of Federal Reserve tightening,” says David Absolon, investment director at Heartwood Investment Management. “However, we also recognize that central banks in the emerging markets will be better positioned to continue with their programmes of supporting growth and inflation as we see more certainty surrounding Fed policy.”
An environment of low oil prices and rising interest rates is likely to focus attention on the bond markets, where large investment grade issuers are likely to perform well.
And how does Japan fare in this interesting global environment? Dean Cashman, team leader and portfolio manager for Japan equity at Eastspring, sees opportunity alongside improving corporate health. “The market’s entrenched negative views on Japan helped to drive share prices to episodically cheap levels some time ago and valuations in many cases remain supportive,” he says. “Negative views are being challenged on the back of meaningful change. Despite market recognition, the ongoing acceleration of corporate restructuring and delivered earnings have yet to be priced into valuations for many companies in Japan.”
Cashman’s premise is not about the impact of world affairs on Japan, but the improvements that have been taking place domestically. “In the midst of a difficult market environment, corporates in Japan have undergone structural change which has been accelerating since 2008,” he says. “This positive change in corporate behaviour has also been supportive for delivered earnings.” Cashman says that Japan has now enjoyed 11 consecutive quarters of positive earnings growth from its companies. “In aggregate, the long process of balance sheet repair in Japan is well and truly over.”
But global events will impact Japan too. A strong dollar and weaker yen would help Japanese exporters; any improvement in China will also help demand for Japanese products and services; and political volatility is likely to drive assets to safe havens like yen products. It will be an interesting year.
