Prepare for the unexpected

The economic and market environment for next year should favour equities, particularly in Japan and the eurozone due to the low interest rate policies being adopted by their central banks, while Japanese real estate should also perform well.

These views come from the multi-asset research team at Source, a provider of exchange-traded products (ETPs) in Europe. Diverging economic performance is expected to result in moderate global growth and low inflation, with 2016 consensus forecasts of 3.4 percent and 3.2 percent respectively. The team expects the US economy to continue to expand, China to avoid a hard landing, the eurozone to stabilise and commodity prices to continue adjusting lower. Within equities, financials and value stocks may be the greatest beneficiaries from this environment, while growth sectors such as consumer staples, healthcare and technology could lag.

The following are some of the key issues on which the market will focus its attention in 2016:

Whether China will avoid a hard landing.

The pace of interest rate increases by the Federal Reserve and Bank of England, and any signs that the hikes are dampening activity.

The possibility of more aggressive easing by the European Central Bank and Bank of Japan.

US presidential elections.

The UK’s potential exit from the European Union,

How the Rio Olympics and commodity prices impact Brazil and other emerging markets.

In terms of negative scenarios, Jackson believes that “depression” is the one most feared by the market, and the team assigns a 20 percent probability to this worst case outcome where recession is coupled with deflation. Equities would underperform in this environment, while safe havens including gold and government bonds would perform better.