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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!
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!
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by Gavin Lumsden on Jul 22, 2016 at 16:24