According to global asset manager PineBridge Investments ("PineBridge"), the global economy is likely to experience incremental improvement and a consumer-driven "growth bounce" in 2016 despite market stress and volatility as a result of diverging monetary policy among central banks and the "dark side of QE" holding back intrinsic recovery forces. PineBridge predicts that commodities prices will move higher in the coming year, while the dollar will continue to gain ground against most developed world currencies and US GDP growth will reach 2.7%.
In PineBridge Investments' 2016 Outlook, Chief Economist Markus Schomer explains that extraordinary monetary policy measures have failed to stimulate economic growth and inflation, and are now a growing risk to a sustained recovery following a year of setbacks for the global economy in 2015.
"While the Federal Reserve has started to gradually reduce the emergency monetary policy stimulus, others, especially the European Central Bank (ECB), are still adding to it. Hence, the "dark side of QE" that is holding back the intrinsic recovery forces will continue to dominate the global business cycle in 2016 and beyond, preventing the re-synchronization of business cycles and maintaining the high level of macroeconomic volatility around the world," Schomer said.
PineBridge's Multi-Asset Team provides their top investment picks for 2016, including equities in Japan, Europe, Mexico and India, as well as US value styles and small cap stocks, and lower quality fixed income investments after a year where credit spreads blew out. Other favorites for this year include US high yield, European US-dollar-denominated contingent convertible bonds, liquid alternatives, bank loans and private credit.
Michael Kelly, PineBridge's Global Head of Multi-Asset, cited divergence in the global economy as a key factor, noting that it will stimulate growth in the coming year.
"As we prepare for 2016, a massive divergence in the markets must be resolved. Around the globe, basic industry appears to be in recession while the consumer appears healthy and is gathering steam in major economies like the US and China. Markets seem to have priced in that this divergence will continue. We do not think it can – either the consumer will pull industry up, or industry will pull the consumer down. We think the consumer will have the edge and, as a result, we are entering 2016 positioned for a global growth bounce," Kelly states.
After a year in which the commodity price crash and the perception of a more serious slowdown in China weighed heavily on emerging market fundamentals, with the negative impact of lower commodity prices on industrial output outweighing the positive effects of consumer spending, PineBridge expects the global economy to acclimate to these price levels.
While PineBridge believes that it won't be an easy year for investing in equities due to elevated valuations in stable and visible growth stocks and a lack of discernible catalysts to drive corporate earnings expectations higher, there is some good news.
Anik Sen, PineBridge's Global Head of Equities states that, "We believe 2016 will bring opportunities in long-run themes that play across several industries. In the equity markets, these include automation, media, non-residential construction, the Internet of things, and China's "new" economy."