1. Fed stays the course: We expect short term rates to rise by 1% over 2016, and believe long-term rate rises will be roughly commensurate. We believe the Fed’s board will stick with their stated intentions, it would require dramatic events to make them change course during an election year.

2. A return to risk: We believe risk concerns will weigh on markets all year, primarily driven by rate hikes, stagnant/declining earnings and a slowdown in demand in China and other markets. Continued war and turmoil in the Middle-East and uncertainty in US presidential election could add to the negative sentiment. US equities markets will be down for the year, with a strong possibility that we see a decline of 20% or more over the course of the year.

3. Oil is red: We expect oil prices to continue to be weak in 2016, oil is likely to see the $20-25 range. We expect oil companies (particularly E&P) to face continued stress and expect defaults on high-yield issues in the sector. Oil price declines continue to be driven by softer demand in Asia (particularly China). Expanding supply has also played a role, for the first time in over 40 years, the US will export oil in 2016 (this had been prevented by law since the 70s oil crisis).

4. Emerging markets comeback: We believe smaller emerging market equities will outperform developed markets in North America and Europe which we expect to be stuck in the doldrums during 2016. This opens up opportunities for smaller Asian (ex-China/Russia) and African markets to outperform.

5. A Tech-wreck redux: Technology companies have been among the strongest performers over the past few years. This has been true for both listed and privately traded companies. Some of the outperformance is driven by actual changes in consumer and business behavior; more leisure and work activity is moving online, and that creates opportunities for technology companies that did not exist earlier. However, extremely optimistic valuations for unproven business models have become the norm and we believe the inevitable reckoning is quite likely to occur this year.

6. Commodity economies fumble: Australia and Canada were both spared the worst of the global financial crisis thanks to their resource driven economies and the determination by some governments to support heavy industries that consume them. Neither country suffered a significant real-estate correction for example. We believe both will be among the worst performing markets in 2016.

7. The greenback still rules: We expect upheaval in a number of markets to drive a flight to safety and support USD through 2016. We believe the dollar continues to remain strong in 2016 against Euro and other major currencies.

8. Renewables: We are long-term believers in the prospects of the renewable energy industry and the recently concluded Paris accords should support prices in the sector. The extension of solar credits should also boost the domestic market. We expect renewables to continue outperforming their conventional energy counterparts.

9. Presidential election: 2016 is a US presidential election year and an unusual one to boot. We believe the sentiment favors non-traditional candidates who reject the status-quo. There is a strong possibility one or both major party nominees will be from outside the establishment mainstream. In part this reflects a broad decline in deference to the governing class after the financial crisis of 2008 and the decade that preceded it. Recent European elections in France, Hungary and Greece have reflected similar sentiments. If as we suspect, a candidate opposed to the status-quo ends up on a major party ticket, this will create additional uncertainty weighing on markets in 2016.

10. Unemployment Rises: We expect headline unemployment in the US to end the year above 5%. The softening in global demand, rising rates (however slight) and lackluster earnings we expect will also impact employment within the US. This is in keeping with our expectations of an economic downturn during 2016.

After almost seven long years at effectively zero interest rates, on December 16^th the Federal reserve raised rates 25 basis points and signaled a handful of similar increases to come over the course of the year. This move was not unexpected, and there are numerous caveats and complications since so many unconventional tools have been used over the past seven years. That said, the unequivocal signal is that there has been a “regime change” at the Federal Reserve. We are moving from loose monetary policy to tighter monetary policy. Regardless of whether or not the Fed’s moves actually raise rates across the yield curve or reduce lending, the signal has been received and will have implications for capital markets. For several quarters, we have sought to limit maturities in client bond portfolios in preparation for such a move.

We expect US equity markets to be weighed down heavily by the hikes over the course of 2016. Though 1% may not seem like much, a 1% rise in rates can reduce the present value of a future cash flow stream by over 10%. We also expect significant political and tax-related  uncertainty generated by an unusual election cycle in the US to affect stocks. Clients should expect the same headwinds to impact lower quality bonds as well.

Commodities have had a tough 2015 and we expect this to continue. Though we believe emerging markets (ex-China/Russia) will be one of the better performing assets of 2016, we do not believe this will flow into commodities markets which shall continue to be weighed down by reduced infrastructure build in China and dampened demand in the US and Europe. We have more detailed assessments for the year ahead in our top ten themes for 2016 (attached).

On the personal front, 2015 has been a fruitful year for us from both a personal and business perspective. Subir and Molly welcomed their second daughter, Rosalind into the world in June. We thank all our clients for their trust and confidence in us.

Regards,

Subir Grewal                                                                                                 Louis Berger