Sometimes it is easy to forget the impact the global financial crisis has had on the world.
However, the largest credit event since 1929 has posed a common dilemma for developed markets: how do you repair both private and government balance sheets and still achieve growth in the face of on-going deflationary pressures?
This has inevitably had an impact on asset valuations and future asset returns as policymakers balanced the need for monetary stimulus and low real funding costs.
It is this dilemma, often referred to as financial repression, which has enabled the policymakers to take on a greater role in dictating markets. This is likely to continue into 2016.
It is important to note that rates are still incredibly low for this stage of the economic cycle.
In this sense, mid risk assets that deliver decent yields should continue to perform well. In particular, UK property looks attractive, despite the abnormally high returns the asset class has delivered over the last couple of years.
UK rates – lower for longer
Once we have that lift-off in the US and interest rates increase, the focus is likely to shift to the UK.
We believe the UK will be more cautious in raising rates. The rationale of our belief is that the Bank of England will hike at a slower pace than the Federal Reserve is threefold.
Firstly, UK economy is more sensitive to short rates, with a larger number of floating-rate mortgages in the residential property market and greater openness and exports more exposed to strengthening currency.
Secondly, UK still has some fiscal tightening to do, with further austerity ahead, unlike the US. Combining it with monetary tightening at this stage might put the recovery at risk.
Finally, inflation is still low, well below the target of 2 per cent set by the government. While firms report acute recruitment difficulties, which may add to the wage inflationary pressure, the second order effects of the collapse of the oil price and a continued slowdown in broad industrial commodities provide a strong deflationary force that keeps the inflation low.
Bringing all of this together, rates are likely to stay lower for longer and that strengthens the case for maintaining some duration risk, preferably via gilts.
More oil price volatility to come
Many investors have been shocked by the falls in oil price and the impact it has had on other asset classes. However, oil price volatility is not rare. From an asset allocation perspective, it has mostly impacted broad range of commodities, commodity sensitive equities, emerging market debt and high yield bonds.
Taking a medium-term view, the reluctance of Organisation of the Petroleum Exporting Countries and other oil producers to restrict supply means the oil price is unlikely to bounce back to the mid-2014 levels any time soon.
It is, however, expected to remain volatile, which historically was the case after similar falls.
With Iran looking to supply more to the market, disharmony within OPEC, oil fields in Libya returning online, greater efficiency from shale producers and, not to forget, the constant moving spectrum of geopolitical risk, the rollercoaster ride for commodities and oil in particular is here to stay.
Only in hindsight, when we look back at this unprecedented period will we truly understand the impact of the quantitative easing and the zero interest rate policy.
The influence that policymakers have on markets is clearly not abating and multi-asset investors must position themselves to remain robust against the challenges this presents.
Justin Onuekwusu is Legal & General Investment Manager multi-index fund manager.
