Investors should think differently in 2016

Investors will need to think differently in 2016 as they seek to deal with another year of volatility, according to a Global Market Outlook for 2016 released by State Street Global Advisors (SSGA).

The outlook is broadly predicting low and slow growth in the face of which investors will need to focus on getting more from their core, avoiding over-diversification and balancing protection with performance.

The outlook also warns that Chinese economic growth could fall short of expectations and have significant negative ramifications for Asia-Pacific economies.

The SSGA analysis forecasts China to grow six per cent in 2016, down from an estimated 6.5 per cent in 2015, and lower than the International Monetary Fund's (IMF's) prediction of 6.3 per cent, and Bloomberg consensus forecast of 6.5 per cent.

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Commenting on the analysis, SSGA's Asia-Pacific senior managing director and head of investments, Kevin Anderson said the company's caution was prompted by the persistence of many structural challenges in the Chinese economy, including excess manufacturing capacity and persistent deflation.

SSGA expects emerging markets overall to grow by 4.3 per cent in 2016, modestly up on an estimated 4.2 per cent growth in 2015. However, it cautions that while these markets should be supported by continued slow expansion in the US, easy monetary policies in Europe and Japan, and a positive impact from lower oil prices, they also face cyclical and secular headwinds.

Looking to the situation with respect to US quantitative easing, the report said that for 2016, a US interest rate hike might feed a vicious circle by accelerating capital outflow from emerging markets, prompting more EM currency weakness. This, in turn, could lead to possible corporate debt service problems, particularly given the sharp rise in hard currency corporate debt levels.

Anderson said the downside risks to growth were seen as emanating primarily from the emerging markets, so the anticipated improvement there was far from guaranteed.

"Each investor should weigh the opportunities against the risk, given their own level of appetite, but we would advocate taking a long-term view, especially while there is uncertainty," he said.

SSGA believes developed market equities, excluding the US, will remain the best asset class for returns, while global government bonds will be the worst. Commodity and interest rate-exposed sectors and asset classes will underperform, while consumer-related sectors and asset classes with a reasonable risk-adjusted yield will outperform.