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2016: What’s Coming – the Good, the Bad or Mediocrity.

Another year starting so what’s in store for investors and markets?

In 2015 the GDP of the US economy grew at 2.4%, the UK did 2.5% and the EU managed 1.5% with all its currency and migrant upheavals (GS, 2015). China slowed down yet still reported 6.9% causing investors or speculators a heap of disappointment or margin call troubles depending on what figures one believes. India performed better at 7.4% and seems to have the confidence of pundits for an improvement in 2016 to 7.8% (GS, 2015). Let’s hope so, as India the world’s largest democracy, has disappointed before and there’s still plenty of debt and cronyism in its large institutions.

China will most likely continue its rebalancing act from capital investment to consumer orientated economic growth, however this is long term story of which 2016 will be just another year. The environmental crisis of sorting out the smog in its cities along with building more military capability plus creating islands around its claimed coastal waters will most likely remain priorities for its government and state owned enterprises. With Goldman Sachs projecting slightly lower GDP growth of 6.4% in 2016 let’s hope those municipal debt-financing vehicles remain benign and out of mind.

The mighty US is projected at 2.2% for 2016, it perhaps may surprise to the upside in a presidential election year and although wages for the median earners has improved since 2009 any increase in their wages would boost confidence. The Fed will raise rates accordingly to dampen any inflationary blips although with China slowing, low oil prices remaining, input costs and import volumes should remain manageable with 25 b.p increases to counter-balance any behind-the-curve inflationary or lending worries.

In the Eurozone, it’s harder to say however Goldman forecast 1.7% growth although Greek debt, currency, and migrant problems still persist and proper reform of supranational institutions and national issues seem to be lagging events. The rise of nationalist or protest parties will remain although whether this continues depends on proper reform or agreements being completed by mainstream parties still in the ascendancy. Let’s hope so there.

The UK, forecasted at a reasonable 2.7% GDP growth rate in 2016, will most likely start raising its base rate too. Let’s hope that doesn’t wreck the delicate balancing act of borrowers, especially mortgage holders, in the forever expensive UK housing market. Governor of the Bank of England Mark Carney will have to play as carefully, as Janet Yellen at the US Fed, not to crash the economy on this delicate issue.

In saying that an increase in UK spending in social housing and commencement of some infrastructure projects would be appreciated, admittedly expensive for government borrowing to GDP levels, although highly required in the South East of England and Midlands where the majority of the population live and work. In Scotland the New Forth Road Bridge and a new aircraft carrier should be ready at the year’s end – here’s hoping after the old bridge has been shut for 3 torturous weeks before Christmas 2015 for emergency repairs.

So what about stock market performance then?

In 2015 the FTSE100 is down 3.7% approx. for the YTD and the S&P500 broadly flat at 2050-2061. The Shanghai SE Composite has risen from c.3000-5000, back to about 3000 and now it’s about 3500+ so a Chinese roller coaster journey for 2015. Simply put who knows where they’ll end up, personally I think the late December rally may extend in to the early part of the year then events will take over.

If those US and UK rate rises choke demand as debt becomes tighter and more expensive or geo-political tensions scare people enough into economic retrenchment or misguided military responses to threats or wars in the Middle East. The US doesn’t respond well the choices of the new president. The EU fudges everything and the UK relies on house price debt-fuelled growth again and not productivity or value added growth. China has more financial scandals and scares of rebalancing growth.

These outcomes in 2016 will affect those Goldman GDP growth estimates and most certainly the indices of the world’s leading stock markets. Personally, 2015 has been a down year for me along with plenty others too.

Naturally, I wish to talk it up markets so end by saying 7 billion people get up every day and do something with their time, whether in luxury or penury, to satisfy their needs and wants. The demand occurs by sheer numbers and there lies both the challenge and opportunity for all in improving supply, regulation and consumption.

As long as there’s free choice and the ability or indeed the will to help others, materials needs should be addressed. So in 2016 let’s hope some common sense prevails and let humanity innovate and prosper so I’m staying long and hope everyone can play their part too.

P.S In Japan in equities managed about 9% gain in 2015 and Italy’s FTSE MIB returned over 13%. Although whether this carries on in 2016 is subject to events as discussed. The US slight increase in 2015 has a lot to do with the technology giants of Google, Apple and Amazon providing the gains (Source: Bloomberg/Lewin).

Good luck and best wishes for 2016.

LDC.

Reference:

Goldman Sachs, (2015), “2016 Macroeconomic Outlook”, Website accessed: 27th December 2015:
http://www.goldmansachs.com/our-thinking/pages/outlook-2016/index.html?

Financial Times; (2015); “ Market performance for 2015 in figures”, by Michael Mackenzie and Joel Lewin; London, UK. Website accessed 29/12/2015:
http://www.ft.com/cms/s/0/70a80b66-aedf-11e5-993b-c425a3d2b65a.html?siteedition=uk#axzz3voTSroas

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