We are unlikely to see any significant move in commodity prices in the first quarter of 2016. However, prices may stabilise or drift slightly higher, particularly if tentative signs of stabilisation in China strengthen in the new year. Commodities may fare better next year if the US dollar weakens after the first interest rate rise. We feel that the price of oil is likely to rise from its current level, although the timing is uncertain.
With low yields across asset classes, investors now primarily hold cash for its safe-haven status or as they wait for better entry points to other asset classes. We do not see this changing in the first quarter of 2016. Major central bank interest rates will remain at or near record lows, even if the US Federal Reserve does hike [its rate].
Michael Stanes, investment director, Heartwood Investment Management
The US is set to retain its role as the engine of global economic growth in 2016, but this is likely to remain modest versus previous economic cycles, allowing the Federal Reserve to proceed on a gradual tightening path. The Bank of England is likely to follow suit and initiate its tightening policy, in contrast to Europe and Japan where ongoing central bank stimulus is expected to support those economies’ mild recoveries. It is prudent to keep a short duration profile in fixed income, holding exposure to shorter-dated bonds and constraining market weight to this asset class.
Equities offer the best potential risk-adjusted returns against other asset classes in the longer term. While we are maintaining our overweight exposure to this asset class from a strategic perspective, the tactical orientation of our exposure across style, sector and market cap is set to change in 2016. We have been in a prolonged period of growth stocks outperforming value stocks since 2009 and this dispersion is at extreme levels, particularly in the US. We expect to be reducing our US growth bias in favour of upping exposure to the more cyclical markets of Europe and Japan.
We maintain a positive outlook on UK commercial property, but recognise there will be more challenges in 2016. Rising rental growth is expected to be sustained by favourable supply and demand dynamics. Moreover, UK commercial property continues to yield in excess of other comparable assets and it should attract international investor flows in a low interest rate environment. The interest rate tightening cycles in both the UK and the US are expected to be relatively shallow, which should maintain investors’ interest in higher income assets such as property.
We retain a cautious outlook on the commodities sector as the theme of oversupply is expected to persist. However, excess oil inventories should begin to fall in 2016, leading to a more balanced scenario towards 2017, while demand is expected to improve gradually. Barring an exogenous event – such as geopolitical risk – the oil price may bounce around, but we are not expecting any meaningful and sustained move in either direction. China’s structural slowdown and expected consumption will be crucial for the industrial metals sector, where the fundamentals remain mixed.