IG’s global market outlook for 2016

IG Group’s Chris Beauchamp, senior market analyst, and Alastair McCaig, market analyst, give their global market outlook for 2016.

IG’s global market outlook for 2016

September 2016 is unlikely to be the end date for the ECB’s quantitative easing (QE) scheme. ECB President Mario Draghi has done a good job in talking down the strength of the Euro, and has instilled confidence in the markets with his “whatever it takes” mantra. With inflation being held at low levels by oil prices, a second version of ECB QE looks inevitable with a broader remit and an increased monthly budget.

The eurozone still faces headwinds. Political instability and the balance between stimulus and austerity has been difficult to judge – nowhere is that clearer than Greece. That particular problem has only been put aside to be dealt with later. Also looming in the background is political change in Portugal, Spain and France.

Furthermore, the rise of ISIS on the door step of Europe has seen an increase in refugees crossing into the EU. While this has added to the budgetary pressures of local councils around Europe, in the longer term it is likely to have a positive impact on countries.

BoE to continue discussion of rate cuts

In contrast to the US, the Bank of England has as much reason to cut rates as to raise currently. Weak data continues in the UK, with GBP / USD likely to move towards $1.50 and to continue to weaken in 2016. Following on from recent discussions by the Monetary Policy Committee, it is to be expected that a rate cut will be increasingly discussed in 2016, and it is still not out of the question that we may see another round of quantitative easing.

In terms of a Brexit – the longer the debate goes on the more volatile markets are likely to become. The Conservatives pledge a referendum before the end of 2017 but the business community want one much sooner to avoid uncertainty hanging over the economy. The EU still remains the UK’s largest trade partner and leaving the EU would damage our competitiveness in the region. Part of the UK’s attraction has been that we are an EU nation while not fully subjected to the legislation of the eurozone.

Continued strength of equity markets in 2016

The bull market in equities will continue in 2016, although we expect to see a modest correction in the first quarter. Tracking the index is no longer advised and stock picking will be crucial but equities still look set to produce the highest returns and offer the most compelling investment case. The key equity sectors to watch in 2016 are miners, housebuilders and supermarkets.

Miners still stuck in a hole

Compared with a year ago, mining shares look much more attractive but cheap things tend to get cheaper. There is no end in sight to the commodity slump and returns on invested capital continue to fall, as capital costs rise. Dividends are now under threat as a result and we could see BHP Billiton and Rio Tinto cut their dividends. For BHP Billiton, the Brazil disaster could be the catalyst which makes them reassess their dividend payment. We are also likely to see selective mergers in the sector.

Shaky foundations for housebuilders

UK housebuilders Taylor Wimpey, Persimmon, Barratt and Berkeley Group are all among the top twenty gainers in the FTSE 350 in 2015 and rising wages, home prices and government initiatives continue to act as bullish catalysts. However related industries are suffering: brick producers, insulation and kitchen sales all down or seeing slower growth.

The housebuilding sector is looking overvalued though and higher price-to-book values suggest the good times for the sector are over but we may see share prices rise further in 2016 although it’s a sector where stock picking is important. Premium housebuilders such as Barratt and Berkeley Group look less attractive than Taylor Wimpey and Persimmon.

Supermarkets – a false dawn

The hoped-for recovery in UK supermarkets has yet to materialise. Aldi and Lidl continue to gain market share which has risen to 10% since 2012, from 2.5% in 2003. Tesco, Sainsbury’s and Morrisons look increasingly at risk as price wars heat up and while profits are expected to bounce into 2017, this is likely to reverse in coming years.

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