Earlier this month the European Central Bank (ECB) cut its deposit rate by 10 basis points and extended quantitative easing by six months, but without increasing the pace of the easing.
While most commentators expected some form of additional monetary easing, the limited form in which it appeared seemed to increase market uncertainty. Henderson chief economist Simon Ward suggests: “The ECB badly mishandled its communications strategy in the run-up to [the December] meeting, with comments from Mario Draghi and leaks about 20 different easing measures being under consideration encouraging market expectations of much more aggressive action.
“With headline inflation set to rebound, surveys signalling solid GDP growth and M3 (Broad Money aggregate) expansion above the ECB’s ‘reference value’, markets may conclude that the window for further easing has closed, putting a floor under the euro.”
Meanwhile, in the US the stage seems set for the Federal Reserve to take the plunge and finally introduce a rate hike this month. In recent testimony to the US Congress in the Joint Economic Committee, chairwoman Janet Yellen noted the risks to the outlook for economic activity and the US labour market were “very close to balanced”.
She said: “I judge that US economic growth is likely to be sufficient over the next year or two to result in further improvement in the labour market. Ongoing gains in that market, coupled with my judgement that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2 per cent as the disinflationary effects of declines in energy and import prices wane.”
Ms Yellen pointed out recent monetary policy decisions reflected the need to respond “more readily” to upside surprises in inflation, economic growth and employment, but acknowledged the need to take into account the lag in the effect of monetary policy and the consequences of delaying normalisation for too long.
She explained: “We are likely to end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.
“On balance, economic and financial information received since our October meeting has been consistent with our expectations of continued improvement in the labour market. Between [December 3] and the next [Federal Open Market Committee meeting], we will receive additional data that bears on the economic outlook. We will assess all of the available data and its implications for the outlook in making our policy decisions.”
Looking ahead, macroeconomic factors seem set to continue dominating market sentiment – with escalating turmoil in the Middle East, concerns over China’s slowing growth and Japan’s continued struggle to jump-start its economy, there are few bright spots on the horizon.
But for the more contrarian investors this can prove the perfect time to discover unloved or overlooked opportunities, while emerging markets and Asia in general could be seeing a resurgence, driven partly by India’s economic turnaround.
Old Mutual Global Investors head of Asian equities Josh Crabb notes: “We don’t believe returns in 2016 will necessarily come from the concentrated sector and country positioning that investors have hitherto been used to. That said, we believe the Vietnamese stockmarket should outperform other regional stockmarkets next year given valuations are still cheap relative to the rest of the Asian region, and the country will be one of the key beneficiaries of the Trans-Pacific Partnership trade agreement, given its manufacturing and export potential.”
He points out that in spite of concerns about China’s transition from an investment-led economy to one driven by services, consumption and value-added manufacturing, this change “is throwing up some interesting investment ideas”.
Mr Crabb points to topics such as a technology import substitution theme, whereby rather than buying Apple or similar smartphones Chinese consumers now have the option to buy “home-grown” models from firms such as Xiaomi, the world’s fourth largest smartphone manufacturer.
Nyree Stewart is features editor at Investment Adviser