Investment Adviser asks three experts for their outlook for the next three months.
Toby Hayes, portfolio manager, Franklin Diversified Income fund, Franklin Templeton
Our economic outlook remains bearish and so while short-end yields may rise if the Federal Reserve hikes interest rates, long-end yields still offer value. US equities outperformed US high-yield bonds in 2015, we believe by more than fundamentals justify. Earnings in the country have been poor, constrained by the dollar’s rise. Yet market-implied default rates for high-yield bonds are at recessionary levels, which we believe is excessive pessimism and so a reversal may be due.
While the European Central Bank’s programme of quantitative easing continues, and is possibly extended, we remain overweight European equities and have a positive outlook on consumption in the region. We also maintain our bullish stance on equities in Japan, where additional stimulus measures may be under way. The Japanese yen’s status as a currency with cheap borrowing rates will continue to play an important role.
The outlook is weak for Australian real estate. As a result we have paired a long position in equities overall with a short position focused on financial institutions, due to the country’s banks having a high degree of exposure to property.
We believe commodity prices will find a bottom soon and are susceptible to a sudden reversal if sentiment improves. But for any rally to be sustained, global growth – and especially Chinese data – will have to improve sharply, which we place a low probability on.
Inflation will remain low across the globe, with many regions continuing to experience deflation. Although nominal rates are low, cash continues to offer some real return as a low-risk alternative from expensive bonds.
Nick Peters, portfolio manager, Fidelity Solutions
Yields should remain low across traditional fixed income asset classes, such as government bonds. While the start of the tightening cycle in the US should signal higher yields in the medium term, the process is likely to be slow and gradual. Combined with the time lag of monetary policy, yields are therefore likely to remain at the lower bound for a while yet.
Looking ahead to the first quarter of 2016, equity markets should be supported by loose monetary policy in Europe and Japan. My contrarian call for the year is that the US dollar may well weaken after the first interest rate rise, which could lead to a recovery in emerging markets. As such, we’ve been reducing our underweight position.
A higher US interest rate will ultimately have a negative impact on geared investments, such as Reits [real estate investment trusts]. While there are opportunities – chiefly where Reits offer exposure to a particular investment theme – we retain a negative view on the asset class overall.