Stocks and bonds are unlikely to produce any meaningful returns this year as happened in 2015.
However, stocks generally could outperform bonds.
There are various reasons for their sluggish performance to continue.
First is the slowing global economy.
Many leading economic indicators show that the slowdown is not only in emerging markets but also in developed economies.
Usually, returns from risky assets fall during an economic slump.
But given improvement in the European economy, the region may offer relatively better investment opportunities.
Second, corporate earnings growth is weak.
In major stock markets outside Japan, listed companies have lowered their growth targets.
Globally, earnings growth may fall to about 7 percent. In addition, the growing divergence in earnings forecasts is a negative sign for the stock market.
Third, the scale of share buybacks is expected to shrink significantly.
Such activities have been a major driver for the US stock market in recent years.
But lower corporate earnings will reduce companies’ ability to buy back stocks.
Meanwhile, the spread between corporate bond yields and treasuries has risen notably, limiting stock buybacks.
Fourth is the pace of interest rate hikes by the Federal Reserve.
This year is likely to see fewer than four interest rate increases. Analysts say there might be two.
Such increases will not help bonds. Moreover, the British and German central banks may follow the Fed’s lead.
The stock market can absorb the impact of any further rate hikes, so share prices could pick up later this year.
At present, bonds, stocks and other asset classes are enjoying high valuations.
Meanwhile, emerging markets, especially China, face breaker economic prospects.
Capital has been flowing out of emerging markets amid high corporate debt, a strong US dollar, slowing regional economies and a weakening yuan.
In the long term, emerging market stocks and bonds will regain their luster but investors will continue to face short-term uncertainty.
Geopolitical issues will continue to cloud financial markets this year.
This article appeared in the Hong Kong Economic Journal on Feb. 22.
Translation by Myssie You
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