Volatility seems set to linger throughout global markets in 2016 as investors come to terms with a global slowdown. A number of factors and events will take centre stage respectively in the coming year with core focus on the commodities sector of worthy mention.

Having seen the US Fed raise interest rates last week for the first time in a decade, 3 to 4 more gradual hikes are expected in the coming year, with economists anticipating the next hike in March 2016. The presentiment will remain a cautious one as global markets continue to struggle in the absence of adequate global growth. With a recovering US economy to face presidential elections next year, US equity and credit markets could encounter further volatility in 2016.

The Bank of England (BOE) is also expected to raise interest rates in 2016 as the Pound and economic performance strengthened firmly in the current year. Expected GDP figures due Wednesday will give further clarity as to the path the BOE will take as to raising interest rates. However, a crucial EU membership vote in the UK to be potentially brought forward to next year may steer added volatility to currency markets and put downward pressure on the Pound against a number of its peers.

Ireland and Portugal are also due general elections, which may see their sovereign bond yields fluctuate ahead of the uncertainty of an outcome. Forming an integral part of the ECB’s projected Eurozone recovery, added potential Quantitative Easing measures in 2016 may well be partly reliant on the economic performance of these peripheral countries.

All the above highlight political risks which may in my opinion create a lag effect on growth recovery. In already tumultuous times for the markets, added uncertainty and political issues won’t contribute to supporting well needed positive fundamentals in these respective markets.

Over and above, the fall in commodity prices in 2015 was and remains the main driver of sluggish global growth with many developed and emerging market commodity exporters bearing the consequences. The fall in oil prices, where Brent yesterday fell to a 10 year low of $36.17 a barrel, continues to be a drag, especially on emerging market economies. The benefits brought on by lower oil prices were more than offset in emerging markets by a decline in economic activity as the majority of exporters in these countries are commodities based. 2016 will be heavily reliant on an upturn in the commodities sector, predominantly Oil and Gas. With economists sharing mixed opinions in forecasting 2016 Oil prices, volatility is there to stay.

Emerging markets also face encountering another tough year as a strengthening USD brought on by Fed rate hikes, could most likely result in a continued outflow of capital from emerging market currency denominated assets.

Overall, I believe any Monetary and fiscal reforms to be undertaken in 2016 should be free of political motives and have the sole aim of getting GDP growth back on track. From further Quantitative easing measures in China and the Eurozone to Rate hikes in the US and the UK, investors in 2016 seem set to ride the same roller coaster as they rode in 2015.

 

This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.  

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