Global growth is going to be “low and slow”, but Eurozone, Japan or the US housing industry are potential bright spots in 2016.
In the report ETF & Investment Outlook for 2016, State Street Global Advisors (SSGA) said investors are facing a challenging 2016 amid weak economic growth marked by subdued inflation and generally accommodative monetary policy.
"Despite the heightened volatility seen at the beginning of 2016, we don’t think that the growth story is over. But investors do need to be selective targeting specific regions, sectors and industries, rather than buying the equities market with broad exposures,” said Ray Chan, vice president and head of ETF Business Development, Asia ex-Japan at State Street Global Advisors.
“In equities, we favour areas of growth with macro-economic tailwinds such as the Eurozone, Japan and financial and consumer related sectors in the United States.” Chan added, “In fixed income, continued-low government bond yields and the desire for protection from rising rates mean investors may have to explore more credit-sensitive sectors including high yield, senior loans and convertibles. We favour taking a balanced approach with a mix of interest rate and the credit sensitive sectors.”
SSGA also holds the view that risks are skewed to the downside as fragile markets could quickly turn volatile on a single bad data point or negative news event. In addition, market volatility could increase in 2016 on various factors including further economic slowing and market dislocations in China, a major slowdown in US earnings growth, US and Congressional elections, another debt flare-up in the Eurozone as well as escalating geopolitical tensions in the Middle East.
In the US, SSGA favours sector and industry investing to take advantage of fundamental trends in the economy and macro environment, such as earnings momentum and rising rates. It believes a resilient consumer and potentially more rate hikes by the Federal Reserve should continue to support and fuel top and bottom line growth in consumer related and financial sectors.
Homebuilders and the more discretionary housing related industries are attractive due to an improving employment picture and increasing household spending. SSGA also views that investors looking to further overweight market segments with high earnings and revenue growth may consider the health care and technology sectors.
International equities
Outside the US, SSGA favours areas of growth with macro-economic tailwinds. It believes the Eurozone is attractive due to continued European Central Bank (ECB) stimulus, downward pressure on the euro, improving lending conditions and investors looking for yield in equities due to extremely low or even negative bond yields.
Japan is also attractive, with the Bank of Japan’s commitment to increasing inflation and fuelling growth remains one of the “three arrows” of “Abenomics.” A second “arrow” is a focus on creating shareholder value. Prime Minister Shinzo Abe’s paramount emphasis on shareholder returns and improving corporate performance has made return on equity a focus of Japanese firms. Screening for these companies, which also do not trade at expensive multiples, is one way to access the growth engine of Japan.
In emerging markets, despite the underperformance, SSGA still thinks that this asset class warrants an allocation as tide appears to be turning in these markets in terms of reforms. Many nations are enacting rules and reforms aimed at improving corporate governance, with a focus on increasing the quality of balance sheets and other growth measures to support their economies. A smart beta approach focused on companies with these pre-existing traits may lower the volatility of investing in emerging markets, and provide a compelling alternative to a market cap-weighted portfolio.
In fixed income, SSGA believes that today’s diversified fixed income portfolio requires more than a simple mix of US Treasuries, corporate debt and high-quality structured credit. As predicting the path of interest rates has proven to be an extremely difficult, an active core fixed income strategy with experienced managers may play a critical role in a portfolio by seeking to provide stability, diversification and income.
Furthermore, according to SSGA, investors seeking additional income at low levels of duration, and those who are able to withstand a higher level of credit risk, senior loans, high-yield corporate bonds and convertible securities are areas that may be considered for their diversification benefits and other characteristics.
