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Will stock markets 'lift off' in 2016?

An overview of the world economy and investment markets with a little help from British astronaut Tim Peake!

Will stock markets 'lift off' in 2016?

2015 was a difficult year for investors but US interest rates have now risen and that leaves markets at a significant turning point.

Can't watch now? Read the script

2015 was a difficult year for investors. Concerns over the falling oil price, China’s economic slowdown and anticipation of a rise in US interest rates hit all major markets apart from Japan and Europe.

That’s left investors cautious about 2016. But US interest rates have now risen and that leaves markets at a significant turning point.

The decision by the Federal Reserve to raise its funds rate from the near zero level it had been frozen at for six years was described as a ‘lift off’ by some excited commentators.

Yet a small step for the US central bank was a giant leap for everyone else.

Fed chair Janet Yellen was saying the world’s biggest economy was strong enough to cope with the first hike in interest rates in nine years and that the economic emergency caused by the 2008 banking crash was over!

Whether investors see the benefit of that in 2016 depends on the speed at which US interest rates rise from here and the impact that has on the dollar.

To understand why let’s join British astronaut Tim Peake for an overview of the global economy!

What we see is a world gripped by conflict and political turmoil whose economy is slowly escaping the great recession after the 2008 crash.

The US is in good shape: its financial system repaired and unemployment lowered although its stock market is expensive after advances in previous years.

By contrast China, the world’s second super power, is in a painful transition from a rapidly growing, state-led economy to a slower-growing consumer-based society.

A speculative bubble in its stock market burst in the summer, increasing fears about its position.

China’s slowdown means it needs fewer raw materials to build things than before. That’s cut trade with neighbours in Asia and other big emerging markets such as Brazil.

China’s reduced demand for coal and metals has hurt mining companies. As many are listed on the London Stock Exchange that’s hit the FTSE 100 as well.

The oil price has tumbled again as Saudi Arabia and other members of Opec maintain high production to compete with shale-based producers in the US.

The low oil price is good news for consumers and countries that import energy. In 2015 we only saw the negative effects as energy companies slashed spending and cut jobs.

The commodities slump adds to fears the world faces deflation in which the price of goods falls, damaging profits and wages.

Europe’s recovery is less advanced than America’s but the European Central Bank is doing all it can to inject some fizz into the economy.

Japan is also engaged in quantitative easing or money printing as prime minister Shinzo Abe’s reforms pull the country out of depression and make it more investor friendly.

Japan and Europe are once again tipped to do well in 2016.

But the key to investment prospects is the dollar. It surged in anticipation of US interest rates rising. That’s been a problem for US companies as it makes their exports more expensive.

But the biggest pain has been felt by emerging markets. Less developed nations saw their currencies tumble as investors withdrew their capital and shifted it to the States where they could get a better return. Meanwhile, the cost of any dollar debts they had increased.

Will the dollar continue to rise? If you listened to Janet Yellen you’d think US interest rates would rise slowly, in which case the dollar may not rise much more and emerging markets might start to recover.

But if you looked at the Fed’s documents you’d think US interest rates could reach 3.5% by the end of the decade, which is more than the market forecasts.

That could be bad for bonds which governments and companies issue when they borrow money. These fixed interest stocks look expensive and have had a turbulent year. A sell-off in them could affect share prices.

Also the divergence between the US – and at some point the UK – in raising rates when Europe and Japan are still relaxing monetary policy means markets will remain uncertain and volatile. 

But it’s important not to be too pessimistic. Although rising US interest rates bring a fresh set of problems and the global economy is not strong, there are plenty of companies out there who can do well in this environment.

So strap yourself in and get ready to take off in to the new year!

13 comments so far. Why not have your say?

Paul Hastings

Dec 24, 2015 at 20:29

Nice summation Gavin. Happy Christmas and a healthy new year.

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Donald Chan

Dec 27, 2015 at 09:49

This "overview" tells us nothing we didn't know already. No personal input whatsoever. (Tim Peake got the wrong number.)

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Dec 27, 2015 at 10:43

US interest rates have risen from near zero to still near zero

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David Andrews

Dec 27, 2015 at 21:36

Thanks Gavin, you are a real star.

I'll be certain to keep one of of your targets in sight:let's have a drink together if you are still there this time next year.

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Dec 30, 2015 at 18:17

Good summary, but markets will be falling back to earth far sooner than Major Tim.

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Michael Peters Fenwicks

Dec 31, 2015 at 09:15

Second & Third QTRs will be good while the rest will be quite mixed.

Overall remain with a fair sentiment.

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Dec 31, 2015 at 11:30

I note the enthusiasm for Japan, alongside Europe. However there have been positive predictions for the Japanese economy before, resulting in little more than a series of "false dawns". Can we really be confident it will finally achieve "take off" in 2016?

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Dec 31, 2015 at 12:24

If there was such optimism markets wouldn't have fallen in the last couple of days.

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Nicholas Kendal

Dec 31, 2015 at 14:29

I enjoyed Tim Peake's explanation of the wrong number he called - apparently he put it down to the number being logged on a spreadsheet that had rounded it up!

Good thing that astronauts don't work in central banks .....

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Dec 31, 2015 at 14:40

All the analysis I've been reading recently, away from the mainstream fantasy and hype, suggests key US metrics are signalling a recession. Three new burger flipper jobs for every engineering job lost isn't adding much to the real economy just as people having to work three jobs to get by isn't.

All that says nothing about the effect on the bank run casino of course or the ongoing politburo chicanery to bail out their insolvent client/owners at everyone else's expense.

What growth there has been is for the most part financially engineered and built on mountains of zero cost borrowing and unlimited politburo purchasing power for those with access to it.

I expect 2016 will be more of the same with a US recession looming.

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Jan 01, 2016 at 01:22

No, not if ultra socialist Osborne has any say. Ozzie only shades him by a whisker for inanity.

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Jan 04, 2016 at 22:10

some stocks will lift off others wont is always the case ...isn't that flaming obvious? ...although "shares fell 5% last year " according to the guy on the news ...try telling that to Chris Mill's Giles Hargreave Harry Nimmo and Cueball.......God this is so irritating...Go to bed lad.

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Jan 13, 2016 at 17:33

Yes interest rates have lifted in the USA but now theres talk of recession there. Yes 2015 was a difficult year especially the 2nd half but small caps did ok, Small cap index up 9% and Aim 100 up 14%. Japan did really well but has been hit this week. I see much the same for 2016 as 2015 maybe there will be a crash, a lot depend son China, can't see stocks taking off though.

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