The Year Ahead

11/12/2015 at 5:40 pm

As years draw to a close it is customary for market observers to make early Christmas presents of their thematic predictions. Here are this blog’s thoughts on some major considerations for 2016.

Starting with the obvious: monetary policy will enter what has become very unfamiliar territory for some economies, including those of Britain and the US. Expectations are that the Fed will tighten policy by 25bp next week; as we have seen, the Bank of England is not expected to follow until well into next year. But market expectations are for the gentlest upward path for rates in recent history on both sides of the Atlantic. Anything more than this will come as a major surprise.

On a connected point, oil made much of the market and macro running this year. The key futures were making new sub-$40 lows just this afternoon. But the key point is that the average price over the last 12 months is $55 as against around $100 for 2014. For cheap energy to mimic the disinflationary pattern established this year would require oil futures to trade down to $30 and settle there throughout 2016. That is a real possibility. On the other hand, a change in OPEC / Saudi Arabian policy on supply could see the price start to climb again. Even if it manages to hold its 2015 range of about $40-60, that will still be significant as the “base effects” of cheap energy on inflation will fade away. In other words the oil price is set to remain a key metric for the world next year – and is entirely unpredictable.

Talking of unpredictable, the election of the next American President is already making headlines almost a year before the event. It will inevitably hog the political limelight in 2016. But elections and electoral arithmetic in Europe are much more interesting from an investment perspective. In several countries, “right-wing populist” or far right parties are riding high in the polls and they tend to be Eurosceptic. We will see how the National Front fares in French regional elections this weekend but there are national elections brewing elsewhere. In Holland, where an election must be held by March 2017 and if history is any guide will take place earlier, the Party for Freedom is polling in the high thirties. In the meantime the Dutch will be voting in an “advisory referendum” come April on the EU’s dealings with Ukraine. There is room for some mild upset on that front and transformational political change at the European level from Holland come the general election. During 2016 the British referendum on EU membership will also be drawing nearer.

Major equity markets showed degrees of volatility this year not witnessed since the crash and panic of 2011. Several currencies had a turbulent time of things too. With the other themes in mind it appears likely that volatility will again feature in 2016.

This list is not exhaustive but will provide us with plenty to chew on over the coming months. In the immortal words of Louis Pasteur: chance favours the prepared mind!

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