Diversification to dominate 2016 – Soc Gen

Diversification to dominate 2016 – Soc Gen

The global economy will continue to grow at a steady pace in 2016, according to Societe Generale private banking’s new year outlook. While the US is clearly the strongest developed world economy, the eurozone and Japan will also expand.

“Japan will continue to outperform other equity markets, but we do see global averages rising by year-end,” said Alan Mudie, the bank’s head of investment strategy.

Pointing to the rate hike from the US Federal Reserve in December last year, the bank’s outlook report said monetary policies would remain very accommodative with low interest rates and sizeable asset purchases throughout 2016.

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“The year will be dominated by continued volatility in financial markets - valuations are stretched in bonds and in developed market equities and GDP and earnings growth will be modestly positive,” Mr Mudie said.

While 2015 ended with relief for investors hoping for a rate hike from the Fed, 2016 has not seen a good start for investors with exposure to the Chinese markets. The rout in Chinese markets in the last few days has got investors worried again, after Chinese stocks fell 7 per cent following the release of weaker than expected manufacturing data.

Markets are cautiously waiting for China’s GDP figures, expected later this month. Weaker than expected figures could continue to spark concerns about the slowdown of the economy.

This is not great news for commodities markets either. Over the past four years, oil - which is dependent on China as its top global consumer, has seen prices go down to below $35 a barrel. Societe Generale’s macro outlook forecasts oil prices to remain stuck at low levels, due to a modest growth in demand. Meanwhile, demand for gold will remain strong in key markets such as India and China, and gold miners will struggle to develop new supply at today’s prices, the report argues.

Emerging markets continue to remain shaky, especially after the Fed’s decision to lift rates. But Mr Mudie believes uncertainty has more to do with macro indicators than the decision from the Fed. “The weakness in emerging markets is linked more to macro imbalances – over-reliance on exploiting raw materials for example – than to Fed rate hikes; they should come as no surprise to any investor.”

Mr Mudie further explained that for this year, diversification and selectivity will be key.