Russell Investment’s 2016 Annual Global Economic Outlook report was released on Wednesday and the general consensus is that investment returns aren’t going to be pretty in the coming 12 months forcing advisors to work for their money in the coming year.
“In our 2015 Annual Global Market Outlook we talked about how the bar for generating investment returns was rising as a result of stretched equity valuations, low bond yields and narrow credit spreads. This reality hit home in 2015. Global equities and fixed income barely posted positive returns for the year and anything related to emerging markets (EM) fared worse,” wrote Jeff Hussey, Russell Investments
’ Global CIO. “Looking ahead to 2016, the bar keeps rising, and we believe it will likely be another year of limited upside potential for investment returns.”
That said, there are five things Russell believes are vital to any success for advisors in 2016.
Active is key in 2016
You’ll need to go far afield this year sourcing as many investment opportunities as is possible to pursue those few with the best chance of delivering positive returns. Active management is the key not only in the investment selection but also in terms of asset allocation choices. Passive is not going to cut it.
Forget U.S. equities
While the Fed hiked interest rates by a quarter point in December and expects the federal funds rate to hit 1.375% by the end of the year, they are still historically low while profit margins are near all-time highs and valuations are leaning to the excessive.
Japan and Europe the favoured places
While emerging markets are looking cheap in comparison to any of the trio, Russell suggests advisors use caution here because things haven’t turned for the better just yet.
“To become more positive, we need to see signs that China’s economy is bottoming, global export demand is picking up, and EM currencies and interest rates have adjusted to Fed tightening expectations,” said Russell’s report.
Canada looks to turn corner
With the S&P/TSX Composite Index off by 11% in 2015 it hasn’t been a good year for Canadian equities. The return of equities to fairer valuations if not downright cheap combined with a dividend yield for the index of 3.3%, Russell sees possible opportunities should oil prices move higher. While no one has a crystal ball it’s likely that equities could have a better year than the economy itself.
U.S. dollar running out of gas
By the second-half of the year the greenback will likely see the end of its bull cycle and in its place emerging markets’ currencies will see the start of what’s expected to be a multi-year period of currency outperformance.