20 October 2018
A drilling barge rig off the coast of Louisiana, United States. Oil prices are expected to remain depressed next year. Photo: Bloomberg
A drilling barge rig off the coast of Louisiana, United States. Oil prices are expected to remain depressed next year. Photo: Bloomberg

How to deal with the ‘three lows’ in 2016

Global capital liquidity, market volatility and the US dollar will make up a “three-high” environment next year, while world economic growth, interest rates and commodity prices and inflation will be the “three lows”. I will discus the investment opportunities from such a backdrop.

Firstly, the low global economic growth. Developed markets are expected to be stable, but not the emerging markets. In the United States, which will be supported by consumption and corporate investment, economic expansion will be in the 2.0 to 2.5 percent range.

Household debt levels have improved in the US. That, together with stronger labor market data, will continue to support consumption growth.

In Europe, although the Greece debt crisis lasted a very long time, the economic recovery in the region has been quite stable in the past year, indicating that the quantitative easing policies have worked well. In the coming year, the market will still need bank credit support, while risks will come from domestic and regional political issues.

In China, consumers and the service sector are likely to the fuel an economic recovery.

Helped by easy monetary policies, the property sector is seeing a rebound in transaction volumes and new construction investments in the country. The manufacturing industry, meanwhile, will stabilize to some extent. 

The government is expected to launch more supportive policies and undertake further rate cuts to shore up growth.

Overall, China’s slowdown and weak commodity prices will negatively impact emerging economies. However, a global recession is a very low possibility.

The second low is interest rates in most of the economies. Many central banks are keeping their benchmark rates at low levels. Asian economies still have plenty of surplus in their external accounts, so their currencies will be stable, giving the central banks enough room to adjust interest rates and support growth. This will be an important theme for investors.

The third low is commodities prices and inflation.

China is in a slowing investment cycle, while commodities are still in abundant supply. This will mean that prices of many resources will remain depressed. According to the US Energy Information Administration, oil output growth in 2016 will be significantly slower. 

Given the high inventory, there’s little possibility of a rapid increase in energy prices. Meanwhile, as China is entering a downward investment cycle, industrial metals will also see their prices capped. 

When commodity prices are low, the greenback is strong and global economic growth is weak, corporate earnings in emerging markets will be kept in check.

Amid this situation, investors can expect the developed markets to outperform emerging markets for a while.

2016 will be a challenging year for investors. Hence, one needs to diversify risks as well as manage their portfolios actively.

As they face a downtrend in returns and higher volatility, investors should adopt a more flexible approach in asset allocation strategies.

This article appeared in the Hong Kong Economic Journal on Dec. 21.

Translation by Myssie You

[Chinese version中文版]

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Managing Director, Chief Market Strategist, Asia, J.P. Morgan Asset Management

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