2015 Q4 letter: Enter risk center stage
After almost seven long years at effectively zero interest rates, on December 16th 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