The document summarizes the outlook for markets and investment strategies in 2016. It notes that markets will likely trade in a broad range with higher volatility as the US Federal Reserve normalizes policy by raising interest rates. While bond yields may rise, the effects on other assets are less clear. The document recommends remaining neutral on equities but upgrading views on Asia ex-Japan. It also suggests turning positive on emerging market high yield bonds which are less exposed to US rate hikes. Overall returns in 2016 are expected to be muted with increased need for agility and thematic investing ideas.

1. Market Watch – December 2015/January 2016
SWINGING ONTO HIGHER GROUND
STRATEGY
Markets likely to trade
in a broad range with
higher volatility as the
Fed normalises policy
EQUITY
Remain neutral, but
upgrade Asia ex-
Japan on attractive
valuations and
stabilising macro
FIXED INCOME
Turn positive on
emerging market
high yield as least
exposed to Fed
policy, with
preference for
Latam
FX
Final phase of USD
strength on the back
of policy divergence.
Stay cautious on
gold
Another year has flown by and in this month’s edition we consider the prospects for 2016. Of
course the calendar-based delineation is arbitrary and we should always be prepared to re-
assess our portfolio, but somehow the year end provides the chance to step back from the daily
noise and take a longer-term view.
From a macro perspective, the big issue for the Year of the Monkey will not be too different from
the Year of the Goat. All that has happened is that we have moved on from asking when the US
Federal Reserve will raise interest rates to wondering how fast they will move. To us, the market
seems overly relaxed about growing inflationary pressures leading to a sequence of rate hikes.
Although this could trouble investment grade bonds, the implications elsewhere are less clear.
We cannot help but think that some of these long-running trends – such as global monetary
easing – are nearly played out. It is still a little early, but we need to start to look for turning points
in the US dollar, commodity prices and emerging market equities, where we are ending our
long-standing underweight and turning neutral.
We expect the Year of the Monkey to be characterized by swings in sentiment and market
direction, and overall returns are likely to be muted. Equity markets will probably end the year
higher, but not by much, and policy uncertainty could increase volatility.
In this environment we need to be agile in finding money-making ideas rather than relying on
rising markets. This could involve thematic investing (such as innovation or “new” China), looking
for higher yielding assets, selling optionality or investing in non-correlated hedge funds. High yield
emerging market bonds are one area that seems to be relatively insulated from US interest rate
hikes, protected by an attractive carry and signs that the fundamentals might be starting to turn.
Marc Van de Walle
Global Head of Products

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