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Market Outlook 2016

Here are some view of the world well-known fund managers:  Rick Rieder, Chief Financial Officer for Fundamental Fixed Income at BlackRock; Bob Michele, Chief Investment Officer for JPMorgan Asset Management; Michael Hasenstab, Chief Investment Officer for Templeton Macro; Matthew Ward, US-based portfolio manager for Schroders and David Harding, Winton Capital Management.

On China, “The critical thing for next year is whether China’s capital flight gets even worse... China is the second-biggest economy in the world, with tentacles everywhere. It’s a really big deal”, Rick Rieder says, “Our basis case is that [interest] rates drift higher, but it (China) is bigger than a tail risk. An exogenous shock could easily take us down again”.

On Global Bond, Bob Michele, actually thinks bond yields globally could fall from here, with central banks in Japan and Europe easing while the Fed tightens monetary policy. He expects the yield on 10-year Treasuries will probably fall back below 2 per cent.  “When the Fed first raises rates the markets will initially start to panic, and think it’s going to hike 3–4 per cent,” he says, adding the yield curve will steepen initially, with yields on long-dated bonds rising. But then, he says attention will turn to the terminal rate, the level at which the Fed stops raising interest rates, and in his view the economic fundamentals are not strong enough for a big rise in rates.  “The dollar could easily go up another 10 per cent, so I think they’d be lucky to get the Fed funds rate up to 1 per cent before having to pause.”

On Emerging Markets, Michael Hasenstab sees value in some emerging markets such as Mexico and South Korea.  “The catalyst for a rally in some of these emerging markets is actually going to be when a rate hike arrives, once people see it does not derail the story,” says Mr Hasenstab, who picks Mexico and some of the South East Asian countries as the biggest outliers. “The markets have priced in a situation that is worse than the great financial crisis, worse than the Asian financial crisis, but the fundamentals don’t justify that.”

For developed market stocks, the consensus call is to buy Europe for the second year running, helped by the strong performance of its markets this year and ongoing policy stimulus from the central banks.

Finally, Daivd Harding commented that "The only certainty when making forecasts is the role of the unexpected.  “People used to say oil couldn’t go above $30 a barrel because Saudi Arabia would open the spigots, and then it went to $100. Everyone ‘knew’ that long bond yields couldn’t go below 4 per cent, even [Fed chairman Alan] Greenspan called it a conundrum when it did. In the 1950s people said that stock yields always had to be higher than bond yields because equities were riskier,” he says. “It’s amazing how surprised people are by surprises.”


Financial Times, Dan McCrum, Robin Wigglesworth and David Oakely, 2015-12-04, "Markets Outlook 2016: What the Fund Managers are saying"