Jeff Salway: Uncertainty only thing investors sure about

THE financial industry’s top crystal ball-gazers tell Jeff Salway what they believe is in store for the markets in the next 12 months

Diversification will be the watchword for investors over the coming year as global markets continue where a volatile 2015 left off.

The recent US rate rise came at the end of an eventful year in which the UK stock market hit an all-time high (before falling to a three-year low this month), China suffered a dramatic downturn and oil prices continued to fall.

The coming year could be similarly turbulent, according to the experts giving us their outlook for 2016, with the UK following the US move on interest rates, oil prices remaining low – Goldman Sachs forecasts $20 a barrel – and concerns over debt issues in emerging markets.

What else lies in store for investors in 2016? Read on:

• Simon Lloyd, Chief Investment Officer, Murray Asset Management

Despite a good start to 2015, it now appears that returns from both UK equities and bonds over the year will be minimal at best. A UK-based investor in overseas markets will have fared a little better.

We can take some comfort from this gloomy outlook as it is likely that cash weightings will be relatively high as a consequence and many of the issues the global economy faces have been well-flagged. If the gloom merchants are correct then the safety of government bonds is likely to offer some comfort.

Turning to equities, it is notable is that, on a global basis, “growth” investments have outperformed “value” for the past five years, with the relative valuations now at an extreme last seen at the height of the tech bubble in late 1999.

Globally, Japan and Europe are both areas seeing liquidity flows from their respective central banks that should help boost economic activity and asset prices. For the brave, economic growth in those emerging markets not exposed to the weakness in commodities prices may well pick up in the coming year as they benefit from weaker currencies and lower input prices.

We expect another volatile year as we gradually approach the end of this extremely extended economic cycle.

• Andrew Milligan, head of global strategy, Standard Life Investments

Investors should be rather selective in what assets they hold in 2016. We like European equities because easy monetary policy continues to support the recovery in company profits.

In countries such as the US or the UK, where profits are under pressure from currency strength and commodity price weakness, the valuations of investment grade corporate bonds are worth considering – as long as recession is avoided.

Global growth will improve modestly in 2016, as continued strength in the developed economies, especially Europe and the US, offsets weakness in many emerging market economies. A key factor will be the success – or otherwise – of China’s efforts to stabilise their economy and limit its deflationary pressures.

Consumption will be supported by lower unemployment, some wages growth and, of course, cheaper oil. Business-to-business spending, for example on technology, matters more as companies invest to keep costs under control or to meet higher standards of regulation. In contrast, exports in general and manufacturing in particular will find life tough as global trade remains muted.

• Alan Steel, chairman of Alan Steel Asset Management

A year ago many people expected another big double-digit return from stock markets. I was less confident. When you look at US indices and the FTSE 250 performance, never mind the sectors I recommended last year, you have to wonder why index trackers continue to attract investors.

It always pays to hold equity income funds. History shows that almost half of total equity returns come from reinvested dividends, which helps cut losses in the bad years. The same happened in 2015 and I expect 2016 to be no different.

However, with interest rates and inflation remaining low, and commodity prices doing likewise, anyone looking for extra returns above the index could go for global businesses with growing dividends and UK and European smaller companies. And as I said a year ago, this is still no time to be in bonds, cash or index trackers.

• Tom Munro, owner of Tom Munro Financial Solutions

I’m fairly positive about 2016, although caution will again be required as markets will inevitably experience certain events which could cause short-term volatility.

Markets should show some improvement in the first quarter of 2016. Now the US rate rise is out of the way and the realisation has sunk in that the global economy is still expanding, investors will struggle to ignore growing company results and the future opportunities they bring.

A downside for 2016 is the likelihood of under-performance from low-risk asset classes such as government and corporate bonds. As in 2015, they are likely to continue offering derisory returns and fund manager exposure to the sector will be mainly to ease volatility in equity markets.

Positive investment returns will probably be generated from risk assets such as equities, and with the corporate sector continuing to expand, private investors will become more confident and start spending more. This in turn should instil further confidence in stock markets and drive them higher. So for me, equity exposure as part of a well-diversified portfolio should generate positive returns in 2016.

• Barry O’Neill, Carbon Financial Partners

As pastimes go, predicting next year’s finishing level of the FTSE 100 or any stock or bond market ranks amongst the most futile. In fact, the experts often get the direction of travel completely wrong in a two-horse race. The only real use of these predictions is that it gives us an insight into confidence levels, ie are there more bulls than bears?

Although making predictions is pointless, taking long-term investment decisions based on what you think will happen over 10 or 20 years is to be encouraged, as it will help you plan for the future. The longer you hold your investments, the more likely you are to experience the long run average return.