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Thursday, January 7, 2016 - 15:39
Diverging policies

The year 2015, which began with buoyant financial markets and great expectations for global growth, may instead be remembered as the “year of the downgrade.” As the months passed, one economy after another slowed, stalled, contracted or reverted to subpar growth, leaving markets and investors vacillating between cautious optimism and outright risk aversion.
We believe volatility will continue to be a driving force in the markets of 2016. In all likelihood, we could see an increase in divergence between the growth rates of different economies during the year, as any rise in US interest rates would have different consequences for various countries. We also expect a deepening divergence of global monetary policy, with US tightening countered by continuing accommodative policies in other major markets.
Both the International Monetary Fund and the Organisation for Economic Co-operation and Development have forecasted improved growth for the global economy in 2016, with the proviso that growth is likely to be uneven across the main countries and regions. To a greater or lesser degree, expansion is expected in the advanced economies of North America, Europe and Asia, with the United States remaining the world’s largest economy. While China’s slowdown caused considerable concern in 2015, falling below its previous targets, we think the economy will continue to grow throughout 2016, albeit at a less blistering pace.
Other emerging markets are entering 2016 in a much weaker position. Some sizable developing economies, such as Russia and Brazil, will need to extricate themselves from recession. Reduced capital flows and currency pressures have affected the ability of some emerging countries to finance vital projects. In turn, weaker demand for commodities and finished goods is having far-reaching effects on advanced economies looking to increase their exports. Supply overhangs of base metals and fuels (especially oil) have led to lower commodity prices, to the point where producers in both developed and emerging markets have been shutting down facilities and laying off workers. The corollary, of course, is that commodity importers, which include a number of eurozone and Asian economies, have benefited from lower costs and greater security of supply.
Fortunately, the leverage levels of many countries, as measured by their debt-to-gross domestic product ratios, have not weakened significantly during the recent period of increased global liquidity resulting from accommodative monetary policy. Many Asian countries in particular are well positioned, having learned the lessons from their financial crises in the late 1990s. At the company level, however, we have seen mismatches between US-dollar liabilities and cash flows in local currencies that have depreciated relative to the dollar. In an environment of rising US rates and global uncertainty, we believe companies with low leverage, stable cash flows, strong brands and growing markets for their products are likely to outperform some of their less stable peers.
Key Central Banks Expected to Remain Accommodative
Last year saw growing divergence in monetary policy worldwide as a number of central banks, most notably those of the eurozone and Japan, initiated generous economic stimulus programs along the lines of the US quantitative easing program, that latter of which had ended in October 2014. During 2015, the US Federal Reserve (Fed) indicated its intention to move away from a zero interest rate policy, which it eventually did in December. Other countries cut their lending rates during the year with the intention of driving down their currencies to boost exports. The success of these measures has been mixed to date.
We anticipate monetary policies around the world will diverge further in 2016 as the Fed continues to tighten while the Bank of Japan, the European Central Bank and a number of central banks in smaller economies maintain or expand their stimulus efforts. Furthermore, as long as the world remains volatile, we expect the programs implemented by many, if not most, of the world’s central banks to continue exerting a dampening effect on interest rates and inflation.
Actively Managing the Changes Ahead
In an environment of increased volatility, market movements can be rapid and unpredictable. As monetary policy divergence continues to unfold in 2016 and the effects of likely higher US interest rates are manifested differently across various economies, we believe a strong local presence and active management style will be crucial in providing a nimble response to market fluctuations, mitigating portfolio risk and capturing unanticipated opportunities, to the potential benefit of our investors.

Copyright © Insurance Times and Investments® Vol:29.1 1st January, 2016
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