2016 investment themes reviewed: “An Uphill Battle”

posted in: Markets | 1

This was a difficult year for our prognostications. We were wrong (or early) on core calls including rising interest rates and an equities bear market, that undercut many other themes that relied on those predictions. Our score was 3.5 out of 10.

  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. As we expected, the Fed was cautious in an election year. Our expectation that the board of governors would vote for a series of quick rises early in the year was wrong, the Fed chose inaction during the election year.
  1. × A return to risk: We believe risk concerns will weigh on markets all year… 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. Broader US equity markets ended up 10% for the year, and though the S&P 500 saw a decline of over 11% earlier in the year, this wasn’t as much as we were looking for.
  1. ? Oil is red: We expect oil prices to continue to be weak in 2016, oil is likely to see the $20-25 range… Oil bottomed at $26 a barrel and remained below $50 for most of the year, a big departure from the $100 prices in 2014.
  1. ? 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… With total returns of 8.58%, the MSCI Emerging Markets index outperformed most developed markets, except the US (where returns were in the double digits).
  1. ? A Tech-wreck redux: Technology companies have been among the strongest performers over the past few years… 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. High profile stocks such as Twitter and LinkedIn suffered large declines this year (LinkedIn was eventually sold), and the Nasdaq composite (7.50%) underperformed the broader S&P500 (11.96%). That said, the broader decline for technology stocks we were expecting did not materialize.
  1. × Commodity economies fumble: Australia and Canada were both spared the worst of the global financial crisis… We believe both will be among the worst performing markets in 2016. Though the Australian market had relatively moderate performance in 2016 (the ASX rose roughly 5%), the Canadian market was one of the best performers (with the TSX up almost 15%).
  1. ? 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. We were right on this call, the dollar has gained over the course of the year, against both the Euro and other major currencies.
  1. × 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…We expect renewables to continue outperforming their conventional energy counterparts. We were wrong on this one. Renewable energy companies had moderate to flat performance, with the Nasdaq Clean Edge index ending the year down over 4%, while the S&P Energy index was up over 20% for the year.
  1. ? 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. We were right on this call. We thought there was a high likelihood that one of the nominees would be from outside mainstream US politics. We believe there was a low likelihood that a non-traditional candidate would win the election. That outlier scenario was realized.
  1. × 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. We were wrong on this call, we ended 2016 with unemployment at 4.7%.

One Response

  1. […] As always, we have published our investment themes for the upcoming year and reviewed our themes for 2016. […]