Toby Hayes, portfolio manager, Franklin Diversified Income fund, Franklin Templeton
Bond yields
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.
Equities
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.
Property
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.
Commodities
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.
Cash
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
Bond yields
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.
Equities
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.
Property
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.
Commodities
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.
Cash
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
Bond yields
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
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.
Property
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.
Commodities
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.
Cash
Our cash position across our portfolios decreased slightly in the second half of 2015 as we increased our equity exposure on market weakness. However, we continue to maintain reasonable levels of liquidity as we expect markets to remain volatile in the short term.
