Here they come! It is that time of the year when the economists, analysts and journalists start to get clarity in their crystal balls for the coming year.
Few get it right.
If we look back to the predictions for 2015, our theme was to "expect the unexpected", that was pretty close to the best prediction you could get.
The US economy was expected to drive global economic growth and carry the global economy. Meanwhile, every major forecast for US economic growth was continually revised downward over the course of the year and the global economy continued to stagnate.
The fallout from continuing lower oil and commodity prices held inflation at levels well below central bank target levels.
Expected interest rate lift-off from the US Federal reserve in June or September did not happen. Canada cut rates twice, German short-term yields went negative.
Equity markets (as measured by the MSCI All World Country Index (ACWI) are basically flat. The US market which is about 52% of the ACWI was also little changed.
Government bond yields in Canada are slightly lower on the year, in the US, slightly higher, but neither significantly as was expected. Many called for US 10 year yields to be at 3% or higher by now.
With many asset classes flat on the year and some lower, holding more cash (or an interest earning money market fund) in a portfolio has been a good option.
The best performer on the year was the $US (especially vs. the $C) so if a Canadian investor had a $US component (even cash) in their balanced and globally diversified portfolio, then that was likely the key driver for positive returns.
Balanced Portfolio returns on the year are going to likely end up slightly positive, but pulling the longer term averages lower.
We have been in a lower return environment and will likely remain there for a while longer. This was also one of our themes for 2015.
Risks to the global economy remain.
Short-term thinking by corporate CEO's (using cash for manipulating share prices higher with buy-backs) and demographic shifts in consumption habits will continue to depress revenue and earnings growth.
The restructuring of China's economy to increase domestic consumption is a wild card. Thus far, the slowing of both imports and exports continues without signs of easing up (shipping indexes are at the lowest levels in years).
Steering the "new" Chinese economy is akin to steering a mega-tanker ship: rather difficult and taking a long period of time. Add a relatively inexperienced crew and there is a recipe for disaster.
The Chinese economy is itself an anchor on the global economic ship and will either keep it from moving forward or drag it down further. The engine is the US economy which without being at "full-steam" cannot pull the global economic ship forward.
Basically, watching China and its global economic impact is going to be as important in 2016 as watching the US Federal Reserve was in 2015.
Thus far, I have seen predictions on both sides of the extreme:
check them out at the link below.
This one stands out for me....
Ruchir Sharma, head of emerging markets and global macro, Morgan Stanley Investment Management:
"We are now just one big shock away from a global downturn, and the next one seems most likely to originate in China, where heavy debt, excessive investment and population decline are combining to undermine growth, while relatively low debt countries from Eastern Europe to South Asia are better positioned to weather the inevitable next turn in the cycle".
I am not likely to be considered for the list of the "brightest minds in finance", however there are plenty of hurdles to overcome to see growth return to the levels of 2009 to 2013 for investor portfolios.
In a balanced and diversified portfolio spread across many different asset classes, any of those asset classes may unexpectedly out-perform or under-perform.
Balance and diversification and an over-weighting of cash to take advantage of future opportunities (if and when they arise) is the best strategy for 2016 portfolios.
Do not expect above average returns until an improvement in global growth allows revenues and earnings to grow again.
Keep the discipline, do not get drawn in to chasing returns at the expense of greater risk.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist