BMO: Global perspectives
Paul Niven, head of Multi-Asset Investment at BMO Global Asset Management, Emea, provides his 2016 asset allocation outlook
Where we’ve come from
Rising risk aversion and the declining oil price has had a marked impact on credit markets, where spreads in high yield issuers remain under pressure (led by energy related issuers) and has undermined mining and resources related shares.
Here, concerns over dividend sustainability are rising despite the recent upturn in non-oil commodity prices (which remain well below year-ago levels). We have seen a number of energy and mining related companies suspend dividend payments and serious questions are being asked on whether some of the highest yielders in the market will succumb to cuts in dividends.
The collapse in the oil price, and commodities more broadly, can clearly be linked in part, to the moderation in Chinese growth. While some of the headlines here are sensational a deeper look at the data suggests that the economy has moderated growth but remains far from a hard landing.
While there may actually be scope for some cyclical improvement in Chinese dataflow from here, this does not resolve the secular changes in demand for commodities from the Chinese economy and the near-term requirement for further response from the supply-side.
The US had benefited materially from the shale boom but, arguably, is coping well despite deteriorating economics of production there. The labour market continues to perform well and, while it seems to have been a close call, the US Federal Reserve was confident enough to raise interest rates in December.
Government bond markets have been well behaved since then and the bond bears have, over this short time period, been confounded again as concerns over inflation levels and heightened risk aversion have dominated.
Opportunities and risks for the year ahead: Stepping back from short-term volatility
Heightened risk aversion, a deflationary impulse from emerging economies and a potential negative feedback loop to the global economy (and corporate earnings) do not present a compelling environment for investors in equity markets. Nonetheless, it is important to step back from short-term volatility and consider the fundamental backdrop.