What’s in store for next year?

From geopolitical crises to financial markets volatility, 2015 has been a turbulent year. Experts from the OCBC Wealth Panel share their thoughts about the outlook for 2016

After a few years of damage inflicted by the global financial crisis and sluggish growth, developed economies seem to be finally on a firmer footing and on their way to normalisation. Europe, Japan and the United States have all made great strides over the past few years and deflationary risks are fading.

In the European Union, austerity is largely over and reforms have been implemented, creating a better environment for growth. Importantly, the banking system looks much healthier and this is improving the effectiveness of monetary policy.

In Japan, labour markets are the tightest in a generation, core inflation is at a 20-year high and the corporate sector has record levels of profitability.

Of course, the US leads the way. Strong household balance sheets and tight labour markets mean that the consumer is in good shape, and the housing market is also rebounding from years of under-investment. Companies are flush with cash and investment is solid.

Meanwhile, US politics provide an amusing distraction, but this is not likely to have much impact on the path of the economy.

Indeed, developed economies are on the verge of a significant turning point where stimulus comes to an end and monetary policy starts to tighten, says Mr Richard Jerram, Chief Economist, Bank of Singapore, member, OCBC Wealth Panel.

As growth stabilises and rolls along at about 2 per cent, the room for big surprises (either positive or negative) should be limited, he says.

In other words, central banks will be very cautious to not raise interest rates too rapidly.

“After years of struggle to reach this position, central banks are not going to risk tightening policy too quickly, but the ever-increasing stimulus of the past seven years will be replaced by an incrementally more cautious stance in 2016,” Mr Jerram explains.

Risks in Asia

Against this global backdrop, Asian economies may continue facing the same economic headwinds they did this year, says Ms Selena Ling, Head of Treasury Research and Strategy, OCBC Bank.

First, as the Federal Reserve raises interest rates in the US, some capital may flow out of Asia to developed markets.

“Given the amount of portfolio capital inflows in Asia since the Global Financial Crisis in 2008 in search of higher yields, the prospect of capital reversals could potentially send Asia financial markets into a tailspin again, as the earlier taper tantrum illustrated,” she says.

Second, China, the region’s biggest economy, will continue to slow. Its growth moderated to around 7 per cent this year and may continue to decelerate next year, given that manufacturing and exports remain soft and the fixed asset investment and real estate markets continued to ease, she explains. A soft landing to around 6.8 per cent next year and 6.5 per cent in 2017 looks possible.

“All in all, looking into the crystal ball, external demand remains tepid and the softening import demand from the US economic recovery does not bode well for the manufacturing value-chains within Asia,” Ms Ling says.

The bright spots

However, OCBC believes that there are still some bright spots. For instance, the Philippines and India are still seeing healthy growth of 6 to 7 per cent, and the emerging economies of Vietnam, Cambodia, Laos and Myanmar are also seeing a robust 6 to 8 per cent growth range compared to Asean which is in the 2 to 5 per cent range.

The other silver lining, Ms Ling says, is that recent momentum in trade and/or regional initiatives like the Asean Economic Community (AEC), the Trans-Pacific Partnership (TPP), the One Belt One Road (OBOR) could facilitate economic integration, kickstart infrastructure investments and promote further liberalisation, especially in the services sectors.

Finally, as China embarks on the first year of its 13th five-year plan (2016 to 2020), the bank believes that Chinese authorities are likely to inject more monetary and fiscal support if needed to engineer a soft landing.

How will markets perform?

Mr Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank, believes that the overall outlook next year should become “less hazy” and investors should enjoy greater clarity with regards to the pace of Fed rate hikes.

Hopefully, the Chinese economy will also show signs of stability, which will benefit commodity prices and emerging economies, he says.

“If these pan out, equities could see a rebound and head higher, which will bring cheer to markets and investors after a dismal 2015,” he says.

While equity markets are likely to remain volatile, at least into the first half of next year, the bank prefers equities to bonds over the medium term as rising interest rates in the US may weigh on bond markets.

It is best to buy gradually going forward over the next six to nine months instead of trying to time markets. A good way to do this is through equity funds, Mr Menon advises.

“Within the equities space, we are most positive on Europe as growth gains traction and given the European Central Bank’s easy monetary policy further,” he adds.

“We also see opportunities in Japan given the loose monetary policy in the country, strong corporate profits and the push for continued reforms by Prime Minister Abe.”

OCBC was previously cautious on Asia ex-Japan equities but it has recently upgraded its views as they are looking more attractive valuation-wise, after the underperformance in 2015.

Investors who are looking to increase exposure can consider buying gradually now, increasing purchases once the Fed gets underway with rate hikes and after the Chinese economy stabilises, Mr Menon says.

Bond funds

For prudence, investors should always own some bonds. However, it is best to invest in shorter dated bonds with a tenor of up to four years as longer dated bonds are more susceptible to interest rate hikes. Bond funds are an easy, cost-effective way to invest in the market.

At the end of the day, the Fed’s actions may be a key determinant of markets’ performance. It is very likely that the Fed will hike rates this month, with Fed Chairman Janet Yellen and other Fed officials alluding to a December rate hike given the improving US economy.

However, OCBC thinks that it is not the timing of the hikes that matters. It is the central bank’s guidance on the pace of future hikes that will have a bigger bearing on markets.

“We see the Fed hiking rates gradually in 2016, possibly once every quarter,” Mr Menon says. “A gradual rise in US interest rates against the backdrop of an improving US economy and better prospects for Europe, Japan and emerging markets should favour riskier assets like equities and high yield corporate bonds.”

In my view

What is your philosophy on making money resolutions?

I usually have a “slow and steady” approach, based on a well-diversified portfolio. I am happy to chase some themes, such as disruptive technologies or global demographics, but in general, I think that this should not be a large part of a portfolio. I am not averse to taking an aggressive approach if the situation creates excessive risk or opportunity, but I don’t see much chance of big moves in financial markets in 2016.

Mr Richard Jerram
Chief Economist, Bank of Singapore
Member, OCBC Wealth Panel

What’s on your personal wish list for 2016?

I hope to see much less economic and political uncertainties in 2016. In the past few years, we have seen the world move from one crisis to another and face many episodes of geopolitical tensions in various parts of the world — all of which have affected businesses and individuals, making it hard to plan. We could do with less turbulence and more stability so that companies can plan better and commit to investments with greater confidence to grow their businesses. This will help economies to grow, allow individuals to enjoy better employment prospects and make the world a happier place to live in.

Mr Vasu Menon
Senior Investment Strategist
Wealth Management Singapore, OCBC Bank
Member, OCBC Wealth Panel

What’s on your personal wish list for 2016?

The traditional saying is “health is wealth” and as we celebrate Christmas and head into the new year, I hope to see more societal, policy and individual focus on growing the “health” part, be it physical, mental or emotional health. My hope is for children to enjoy their childhood, students to have a holistic and well-balanced education, parents to focus on strengthening family bonds, and the elderly to enjoy a fulfilling and active lifestyle, amidst this busy and fast-paced society living in a digital age. While we are busy with our jobs and securing our financial security, we also have to remember to de-stress, re-prioritise and focus on what’s really important in life. When we are healthy, we are also more productive and this contributes to a resilient labour force and dynamic economy. Policymakers are proactively preparing for the challenges of an ageing population, but the responsibilities lie on us as individuals to actively and continuously contribute to society at large.

Ms Selena Ling
Head of Treasury Research and Strategy, OCBC Bank
Member, OCBC Wealth Panel