A Quick Look Ahead for 2016
By Dr. Scott B. MacDonald
New York (KWR) December 28, 2015 - Our approach to forecasting global markets in 2016 is that this is an educated guess. Hopefully, we do better than what Mark Twain noted of venturing a view: "It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt." At the same time it is important to recognize while one may be right on forecasting long-term trends and outcome - dramatic movements and market "noise" in the short to mid term can cause doubt and have a significant impact on performance. This is true in respect to selecting optimal entry, to avoid getting shaken-out, and to realizing shorter-term profits in the face of interim volatility. And we do expect volatility through much of the year.
With that in mind if you thought 2015 was a challenging year, just wait for 2016. The past year was dominated by the Federal Reserve, China, commodity price deflation, and related Emerging Market pain. Geopolitical events abounded - a massive migration of people out of troubled parts of the Middle East and Africa heading to Europe, a number of key elections (the most recent being Argentina, Spain and Venezuela), a very profound political crisis in Syria which now involves Iran, Russia, Europe, Turkey and the U.S., an uptick in radical Islamic terrorist attacks (Paris and San Bernardino), and an unraveling of the old political order in Brazil.? And Puerto Rico's $72 billion debt crisis only deepened.
The combination of the above factors played out in?global equity markets. Investors were confronted with several rounds of volatility, a painful downward plunge in energy and commodity prices as well as related bonds and equities, increasing worries over the health of the high yield market, and?a cooling in U.S. corporate profits. Not to cast all of this in gloom and doom - M&A activity in a number of sectors did help investors see gains in their stock and bond portfolios. And investors did relatively well if they owned FANG, a combination of Facebook (FB), Amazon.com (AMZN), Netflix (NFLX) and Alphabet (GOOGL). In many aspects the U.S. stock market and plain vanilla investments were probably the best bet, while a star, Emerging Markets, was painful.
But it was in the energy and commodity sectors that the carnage was probably the most gruesome. If you had purchased energy producers Chesapeake (CHK) and Marathon Oil (MRO) at $19.76 a share and $28.60 a share respectively at the beginning of the year (January 2nd), you were looking at $4.01 a share and $12.70 a share by December 21st. If that was not enough pain - if you owned stock in Freeport-McMoRan (FCX), one of the world's largest mining enterprises (focused on copper), you saw your price go rom $23.55 to a little over $6 in late December.
Where does this leave us in 2016? What are the main risks facing investors? While we think the U.S. stock market and high grade corporate bond markets are going to function more as a safe harbor to a lot more risk factors, the big calls are going to be on energy and basic materials, Europe and then later, Emerging Markets. The first group is increasingly "interesting" from a valuation standpoint - prices have been crushed. Companies have responded by slashing costs and cutting production. At some point the energy survivors are also going to offer up a buying opportunity, though we may have to wait through much of 2016 before it is worth buying.
The same is true in metals and mining companies. Although much of the sector appears toxic at this stage and is likely to see more pain before gain, companies like FCX, BHP, Barrick Gold (ABX), VALE, and Rio Tinto (RIO) offer value. Most likely these companies are not going out of business and will be among the consolidators at the other end of the cycle (which is still heading down).
The main risk factors for 2016 are as follows:
2016 is going to be another challenging year for investors. We think the big call will be energy and basic materials stocks and bonds, but investors could benefit from opportunities in a diverse range of overseas venues, such as Ireland, northern Europe and India. In the U.S. we like small and medium-sized regional banks- they have gotten better at risk management, know their customers, will benefit from a modest rise in rates, and do not have to contend with the volatility linked to involvement in debt and equity trading and issuance. Technology also remains a favored sector, especially those companies that are increasingly linked to the consumer sector.
As noted above, however, one not only has to get the trends and issues correctly, but also the timing. Therefore, even if one believes in the validity of the energy, basic materials and other themes we have highlighted, one could have made similar arguments over some of these earlier this year and seen significant declines.
Therefore one needs to be cognizant of volatility, both to minimize the dangers of being too early or late, and if you are temperamentally inclined, to take advantage of periodic declines and short-covering rallies. This could mean adoption of a cost-averaging strategy, occasional harvesting of profits, use of covered options or even short sales if that is part of your mandate.
Whether the long-term buy-and-hold strategies that served so many asset managers and older generations will remain the optimal approach remains to be seen. If nothing else, be prepared with a lot of volatility in early 2016, possibly carrying through to the middle or even late in the year.
Those are our humble thoughts for 2016. We wish you all the best.
While the information and opinions contained within have been compiled from sources believed to be reliable, KWR does not represent that it is accurate or complete and it should be relied on as such. Accordingly, nothing in this article shall be construed as offering a guarantee of the accuracy or completeness of the information contained herein, or as an offer or solicitation with respect to the purchase or sale of any security. All opinions and estimates are subject to change without notice. KWR staff, consultants and contributors to the KWR International Advisor may at any time have a long or short position in any security or option mentioned.
KWR International Advisor
Editor: Dr. Scott B. MacDonald, Sr. Consultant
Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant
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