A Look Ahead to 2016

In the December 28th issue of Pensions & Investments, a group of investment strategists was polled regarding their outlook for the markets in the new year.  The panel consisted of Krishna Memani, chief investment officer and head of fixed income of OppenheimerFunds Inc.;  James Paulsen, executive vice president and chief investment strategist of Wells Capital Management;  A. Gary Shilling, president and economist at A. Gary Shilling & Co. Inc. and Tim Hopper, managing director and chief economist of TIAA-CREF.

• Mr. Memani is modestly bullish on equities, predicting returns in the mid- to high single digits only.  He is negative on fixed income.
• Mr. Paulsen likes international equities and real assets - real estate, commodities, etc.  He is negative on fixed income. 
• Mr. Shilling likes 30-year Treasury bonds and the U.S. dollar.  He is short commodities.
• Mr. Hopper likes international equities.  He is negative on fixed income.

The issues discussed included the list below:

Factors for 2016

• U.S. economic growth
• Different actions by Central Banks
• Falling commodity prices
• China
• Geopolitics

US economic growth is being forecast between 2% and 3%.  Mr. Shilling is at the low end and Messrs. Hopper and Paulsen are at the high end of the spectrum.  Mr. Shilling views this as the continuing deleveraging process from the credit crisis.  "...we are eight years into..." a ten year process.

Much ado has been made about the Federal Reserve's raising the interest rate by a quarter point.  Elsewhere, in Europe, China and Japan, the central banks have been adding monetary stimulus to their economies.  Mr. Paulsen said, "...the U.S. is at full employment and is going to have to tighten...The U.S. has crossed over (into) full employment, while no one else is even close to it."  

The other stimulus for the world has been the fall in commodity prices, especially crude oil.  There has been an excess of supply in the world with U.S. shale oil production, Iranian sanctions to be lifted and no cooperation among OPEC members.

China will continue to slow down according to Mr. Memani and may place "deflationary pressures...That will depress prices and create intense bouts of volatility".  Mr. Shilling pointed out that it is still an export driven economy despite the efforts of the Chinese government to change to a consumer based economy.  If the western economies are growing slowly, then China and the emerging markets will be impacted.

The strategists did not view geopolitics as affecting investments, even with the ongoing U.S. presidential race.  Investors should be have enough diversification in their portfolios to handle any events.  Mr. Shilling did not agree.  Investors buy Treasuries and the U.S. dollar in these instances, same as in 2007.