16 predictions for 2016 from the brightest minds in finance

Warnings of constrained growth, recession and the hot sectors to keep an eye on are just some of the topics raised by Australia’s finance experts in their predictions for 2016.

Also read: Why 2016 will be a tougher year for the Aussie economy

Australia can be cautiously optimistic

Tim Harcourt, a fellow in economics at UNSW Business School:

“Better economic growth data and a more resilient labour market have buoyed confidence – the country is thinking about more long term issues like innovation and investing in human capital and thinking about structural changes as we move ‘from the mining boom to the dining boom’ with renewed emphasis on agribusiness services and renewable energy.

The new free trade agreements with South Korea Japan and of course China will help along with a potential pact with India. 

The head winds from China are not as bad as expected there's some growth in Asean and emerging markets and some strength in the USA India and South Korea despite sluggishness in Japan and Europe.”

Also read: CBA cautiously optimistic on year ahead

2016 – another year of constrained growth

Shane Oliver, chief economist at AMP Capital:

“There are good reasons to believe we will simply see a continuation of the constrained uneven global growth that we have been seeing over the last few years.

Global growth is likely to be just above 3 per cent, ranging from (hopefully) the tail end of recessions in Brazil and Russia, to around 2.2 per cent in advanced countries, around 4 per cent in emerging countries and 6.5 per cent in China.

Inflation is likely to remain low on the back of still significant spare capacity and weak commodity prices [and] global interest rates are likely to remain flow, with the US raising rates gradually with the Fed Funds rate struggling to make 1 per cent by year end and continuing monetary easing in Europe, Japan and China.”

Also read: Aussie dollar to hit pre-GFC lows

Watch for a worldwide recession

Ruchir Sharma, head of emerging markets equity and global macro, Morgan Stanley Investment Management:

“We are now just one big shock away from a global downturn, and the next one seems most likely to originate in China, where heavy debt, excessive investment, and population decline are combining to undermine growth, while relatively low-debt countries from Eastern Europe to South Asia look better positioned to weather the inevitable next turn in the cycle.”

Also read: ‘Australia will have a recession,' former Greek finance minister

Fixed income faces a rocky road

Dan Fuss, vice chairman at Loomis Sayles & Co. and co–portfolio manager of the $20 billion Loomis Sayles Bond Fund:

Yields on the benchmark 10-year Treasury note will likely rise to 2.6 percent to 2.8 percent by the end of 2016, Fuss says, although he cautions that the current geopolitical turmoil makes forecasting especially difficult.

For investors with a bond portfolio in these rocky times, Fuss recommends a mix of Treasuries, investment-grade corporates (with maturities of five to 12 years), and high-yield debt has the best chance of success in 2016.

And you’ll need to be especially picky when it comes to high-yield bonds instead of relying on an index fund, he says.

“It’s quite clear that high yield has the best value relative to stocks, but there’s a lot more scatter there.”

Also read: Three ‘safe’ investments anyone can make

Know which equities to watch

Thomas J. Lee, managing partner at Fundstrat Global Advisors:

“Equities are going to do really well in 2016, especially banks and blue-chip businesses.

Banks will benefit from the Fed tightening and will boost their returns on equity as the economy expands.

And when you look at blue chips, they’re going to have the ability to generate stronger returns as the economy picks up.”

Also read: Equities sag as oil prices slump

The EU faces its biggest challenge yet

Rebecca Patterson, chief investment officer of Bessemer Trust:

“The refugee crisis [is] the biggest challenge to the European Union yet.

The horrible terrorist attacks in Paris increased the risk that the refugee crisis could result in a political and/or policy shift, or simply lead consumers to change their spending patterns.

Either could weigh on sentiment around European growth and corporate profits.

The Paris attacks sadly shone a light on the European refugee crisis; I assume more investors globally now are thinking more about what millions of immigrants can mean for an economy and respective markets.

However, I am still not sure that investors globally have adequately thought through what market spillovers the European refugee crisis could trigger over the coming year."

Also read: As refugees arrive in Australia, what will they get?

Expect a lift

Jim Caron, a managing director at Morgan Stanley Investment Management:

“I believe inflation risk premia will return to the markets. This should provide upward lift for 30-year Treasury yields, possibly toward 3.75 percent.

The markets may also be surprised by how slowly the Fed hikes rates in the face of what we think will be an improving economic climate.”

Also read: Federal Reserve meets on historic rate rise

Unicorns will have their moment—or not

Alan Patricof, co-founder of Greycroft Partners:

“I am concerned about the over exuberance in financing of startups.

There are just too many at the moment, and there isn’t enough money to sustain them.

I think inevitably we’re going to see more of these unicorns – startups valued at more than $1 billion – try the public market, and that will finally tell us whether they can support themselves.

By the way, I don’t think there’s enough money around to sustain all of them. We’re going to find out which unicorns can make it.”

Also read: Corporates keen to buy out, use startups

The search for yield will intensify 

Russ Koesterich, global chief investment strategist at BlackRock, the world’s largest money manager:

“The Fed is going to be less important in 2016 – you won’t be able to find income without risk. Asset classes from [master limited partnerships] to high-yield bonds each have their own risks, and none of them are cheap.

You’re going to have to have a multi-asset-class, diversified-yield play.”

Also read: Low rates have the risk-averse hunting for income

Get energized

Barbara Byrne, vice chairman of investment banking at Barclays Capital:

“We will begin to see a recovery in the prices of natural resources for largely – and critically important – political reasons and we’re beginning to see sovereign wealth funds decline – Norway, Saudi Arabia.

I think we’ll see a reversal on that; countries will not be able to afford fluctuations in their reserves.

We’ll probably move to a more stable oil price, which I would say is $60 per barrel, and I think energy assets that are investing in sustainability at the same time that they’re focusing on meeting the needs of the current demands will probably do well.”

Also read: $A down on global oil price worries

Study Latin America

Tulio Vera, chief global investment strategist for the J.P. Morgan Latin American Private Bank:

“There’s a ray of sunshine from Argentina [but] that’s not only important for the country but also for the region.

There will be some very interesting entry points in Latin American assets between now and the end of next year – we are getting closer to a re-entry moment for some of these markets.”

Growth is coming… in 2017

Joseph LaVorgna, chief US economist at Deutsche Bank:

“I’ve got growth accelerating a bit because it seems like there are reasons that the economy should get better, but it’s concerning that 2010 was the best year for growth since before the recession.

As I look forward, the message is ‘more of the same,’ with maybe some optimism into 2017 that whoever the US elects president will pursue growth policies, since this economy hasn’t done well.”

Also read: Economic growth surges, for now

Impact investing will target cancer

Mark Haefele, global chief investment officer at UBS Wealth Management:

“The world’s populations are aging, and demand for cancer treatments will only increase, yet the supply of capital for the riskiest stages of development is limited.

Health-care companies tend to focus on later-stage research, providing an opportunity for earlier-stage investors to earn an attractive long-term return—and benefit society.

This type of practice – known as impact investing – is likely to become more popular as investors seek to align their portfolios with their social values as well as generating a return.”

Also read: Regeneus Ltd Patent Granted for Cancer Vaccine Technology

China will be just fine

Yang Zhao, chief China economist at Nomura Holdings:

“Is there going to be a hard landing in China? I don’t think so.

The labor market remains largely balanced; even with 5.8 percent GDP growth, the economy will create jobs, especially in the labor-intensive services sector.

And it’s unlikely that China’s financial industry is headed for a crisis because most of the country’s institutions are backed by the government. Should any systematically important financial institutions have any problems, we believe that the government will step up to rescue them.”

Also read: China economy shows signs of steadying

Think like a millennial 

Katie Koch, a managing director at Goldman Sachs Asset Management:

“The rise of the millennials will have long-term investment implications – their spending trajectory is getting steeper and increasing compared to baby boomers, who are decreasing their spending as they retire.”

In 2016, Koch is especially keen on Netflix, Nike, H&M, and PChome Online, a Taiwanese e-commerce company, because they prioritize instant information, quick consumption, and healthy living—themes that resonate with the 2 billion people worldwide born from 1980 to 2000.

More of ‘whatever it takes’ from the ECB

Erik Nielsen, chief economist at UniCredit:

“Expect further divergence between the Fed and the ECB, with the former hiking rates a couple of times next year and the latter expanding its balance sheet more than it has presently announced.”