22 February 2019
The price of oil may soon stabilize after falling for over a year. Photo: Bloomberg
The price of oil may soon stabilize after falling for over a year. Photo: Bloomberg

Volatility is inevitable, but opportunities last

As I said previously, 2016 will have a good direction but investors should bear in mind the risks.

Some investment trends are nearing their end. For example, the globally low interest rate environment may soon end, oil prices may stabilize after falling for over a year, while Asian and other emerging economies may rebound as they implement reform measures.

I think 2016 will no less volatile than 2015. But it also brings opportunities.

The stock market will usually suffer turbulence as economic cycles approach their end. We’ve seen sharp ups and downs in the late 1990s.

But I’m not saying 2016 will experience such volatility. I just want to remind investors to balance two risks.

First, they should avoid holding nothing before the stock market rally begins as the stock market for the most part has recorded a good performance after the Fed’s first interest rise in a cycle.

The second risk is big turbulence. In 2016, I think investors may consider adding more bonds in their portfolio. Income investment will continue to be a hot investment theme despite the higher interest rates in the United States.

The bond market will have two themes. First, I prefer US-denominated bonds than euro, yen or emerging market currency bonds. But the euro and the Swiss franc will also grow stronger. Investors should be prepared.

I may also favor emerging market currencies in the middle of the year if the oil price is stabilized by then.

Second, I prefer corporate bonds to sovereign bonds, especially the US high-yield bonds which are currently under downward pressure.

Compared with the average, the 8 percent yield is still very attractive, although there are market concerns about default risk and oil price issues.

After two years of appreciation, the US dollar will continue to be strong against some of the foreign currencies, but the appreciation will be moderate and selective in the coming year.

The euro and the Swiss franc may become slightly weaker due to the divergence in monetary policies. The Aussie will be under pressure because of weak basic metal and iron ore prices.

If the oil price stabilizes, or even improves, the Canadian dollar and other oil-related commodities will bottom out.

Among emerging markets, I prefer Asian currencies because their fundamentals are strong and are already at low prices.

But investors should keep in mind that an oil price rebound will benefit currencies in Brazil, Russia, Malaysia and Indonesia.

This article appeared in the Hong Kong Economic Journal on Dec. 24.

Translation by Myssie You

[Chinese version中文版]

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Investment Strategy Head in Northeast Asia at Standard Chartered (H.K.)

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