For one-quarter of respondents to this month’s Focus Group, the biggest credible threat to the global economy and financial markets in 2016 is the bursting of quantitative easing-fuelled asset price bubbles. “Inflationary effects can quite suddenly bring markets down, if confidence is lost,” says the CEO of a Dutch fund.
The next biggest threat, identified by just over one in five investors, is the continued slowdown in China, with a Finnish fund asserting that a “hard landing in China could cause serious damage to world trade”. A further one in five respondents identified continued unconventional monetary policy.
Almost all respondents anticipate that the digitalisation of the economy, and innovation in engineering and materials, will have a positive impact on their investment strategy, while a similiar number say growth of the middle class in emerging markets will have the same effect. More than three-quarters expect a negative impact from an increase of private and public debt, and the vast majority say population ageing will produce a negative impact.
“We think that the ageing population is a real concern for the global economy because we are going to have a decrease in the potential growth of the economy,” states the CIO of a Spanish fund. “The public sector will have to spend more money in subsidies. The positive side of this is that high levels of unemployment will decrease.”
Just six respondents expect central banks’ influence in financial markets to decrease. The other 29 say their influence will continue. “Central bankers are going to double down to try to hold on to what little influence they still have,” says a UK fund.
More than half of respondents expect their domestic policy rates to remain the same. A Dutch fund says: “There is no tendency visible right now that would lead to higher interest rates. The bottom has probably been reached, and we do not foresee nominal negative interest rates except for very short-term maturities.” Just under one-third of respondents expect rates to be up to 1 percentage point higher than they are today.
Just over half of investors expect their domestic yield curve to have moved very little by the end of 2016, while nine predict that it will have flattened. Five expect that it will remain steep or steepen further, while a few expect it either to have steepened significantly or to have lowered.
Just under half say current economic conditions make short-term, dynamic asset allocation more important, although 14 funds say it is irrelevant, distracting or useless. Three respondents say dynamic asset allocation is less important, but two view it as essential.
A Spanish fund says: “Prices of assets change quickly and high volatility forces managers to an active allocation, and it is essential to analyse the macro tendencies in order to allocate assets in the best way.”
Twenty investors say correlations between asset classes are likely to increase as a result of current economic conditions, with “herd behaviour increasing [and] global one-day trends emerging”, according to a Finnish fund.
Infrastructure is considered the fairest-valued asset class, with domestic 10-year government bonds the most overvalued and commodities undervalued.
For 20 funds, protecting the downside is an investment priority for 2016. For 15, the priority is implementing strategies for a low-rates environment; 10 intend to take advantage of the upside; for nine, de-risking is the top priority; and for six, the focus will be on implementing more tactical or dynamic asset allocation.
Eight respondents have a chief economist, head of research or committee producing a macroeconomic view for strategic and tactical asset allocation, while 11 do not and 16 rely on investment consultants.