BEFORE we start the guessing game for 2016, a quick check on consensus predictions for 2015 is surely in order.
OK, so how many predicted the oil price plunging to below $40 a barrel? I see few hands. Who predicted the outcome of the UK general election? I hear no clamour. The great migration of refugees to Europe? The emerging markets debacle? The China slowdown?
For investors the most dangerous snakes in 2016 may be less financial and economic than geo-political”
If these global shocks were too remote or difficult to predict, how many really thought interest rates in the UK would stay at 0.5 per cent? Or that the UK stock market would fall back for the second year running? That underneath that gentle 3 per cent decline in the FTSE 100, shares in the oil and gas sector would lose 46 per cent, mining stocks would slump 42 per cent and that food retailers, mobile telecoms and pharmaceuticals would all lose ground?
When it comes to 2016, let’s not expect the prediction game to be any easier. Indeed, looking at the board as we throw the dice, ladders there may be, but the snakes look altogether more numerous and more menacing.
For investors the most dangerous snakes in 2016 may be less financial and economic than geo-political. In 2015 global markets were unmoved in the face of terrorist outrages such as the downing of the Russian passenger airliner over the Sinai desert and the bombings in the centre of Paris. Markets barely flickered.
But further terrorist attacks in 2016 may prove less easy to brush aside given the heightened apprehension across the Western world and growing political pressure for more effective response in Syria. The prospect of an armed stand-off between the US and militant Islam could see investors world-wide taking risk off the table.
Nearer home, political uncertainties over the referendum on the UK’s membership of the EU and a Brexit vote may also cloud investor sentiment over UK-based international traders. At the same time there is little likelihood that a vote to remain in the EU will settle what has been a major rift in UK politics for more than a generation.
Interest rates meanwhile have not proved to be as unsettling an issue as many had feared this time last year – other than, of course, fixed interest savers who continue to see a derisory return.
We are now entering the ninth year of so-called temporary, “emergency” rates at 0.5 per cent. Every alert from Bank of England governor Mark Carney of a pending rise in rates has been followed by fresh data pointing to a slowing in the growth pace of the UK economy – and a push-back in expectations of a rate increase. Now, with analysts shading down their GDP forecasts for the year ahead, it looks more likely than not that rates will remain unchanged for 2016.
Another set of official predictions that look to be up-ended are those on the shrinking UK budget deficit. The Office for Budget Responsibility ignored poor figures for October while figures for November showed the deficit widening to £14.2 billion compared with £12.9bn in the same period last year.
If the pattern of the first eight months of fiscal year 2015-16 continued over the rest of the year, the deficit would come in at £81.2bn against the Autumn Statement target of £68.9bn. As this is a key objective of the UK government, this could seriously rattle investor confidence. So much for those writhing snakes. What of the ladders, albeit with rungs missing? The likelihood is that we will continue to see modest UK growth in 2016, helped by a resilient consumer sector. In the year just ending, most shares performed significantly better than the main indices – so long as you avoided the big losers in oils and natural resources. Company earnings outwith these troubled sectors should continue to hold up, auguring well for UK-facing small to mid-size stocks.
Oil and energy look set for another year of losses. But should there be a rally in energy and commodities the benefits would be marked and widely felt across the economy. Buying into bombed-out funds in these sectors on a three to five year view may prove shrewd.
For the moment, the market elsewhere looks fairly valued – the FTSE 100 excluding financials, oils and mining currently sells on a 17.1 price earnings multiple for 2016. So care should be taken on those generalist growth funds.
As for wild cards, brave investors might want to dip a toe into Asia and emerging market trusts which have had a torrid time over the past two years. And investment trusts specialising in the private equity sector look cautiously priced even given the risks involved.
Electra Investment Private Equity, JP Morgan Private Equity and F&C Private Equity have shown management capability. But this is a notoriously difficult sector to predict – more so than the market overall. Which is where we came in. Good luck with the ladders – and mind those snakes.