Despite a tumultuous year in financial markets, the British economy managed to complete its sixth consecutive year of economic . The continued to decline to a post-crisis low of 5.2%.
Yet, the Bank of England stood pat leaving its unchanged at 0.50%. The crash in prices brought the down to hover around zero, well below the BoE’s 2% remit. Weakness in commodities more broadly ensured the would end the year in the red.
What can we expect from UK and global markets over the course of 2016?
We asked some of our top contributing analysts about what may lie ahead:
On the face of it, the biggest risk for the UK next year will be the referendum on membership of the EU.
If we remain in (as the majority of opinion polls suggest) we must accept that “ever closer union” is the objective of the majority of our fellow members. If we leave, much will need to be renegotiated.
Either way, uncertainty will act as a drag on the economy. The most likely date for a vote is either June or September, I suspect the latter. Why not 2017? Because of French (March/April) and German (September) elections – I could see a scenario where the vote gets postponed until 2017 in spite of these events.
The next factor influencing markets is the normalisation of regulatory tightening, which has seen UK banks forced to increase their Risk Weighted Assets dramatically over the last six years. The FPC will impose a 1% counter-cyclical capital buffer in the near future, but otherwise the fiscal tightening has finally run its course; this is tantamount to an easing of monetary policy.
The final factor is the state of the government budget deficit. Recent OBR data revealed a marked improvement in tax receipts, but further improvement in the fiscal position relies on sterling maintaining support and interest rates remaining lower for longer. Referendum uncertainty could scupper this “ship of happiness”.
have traded between 1.34% and 1.92% during the last year. If the rallies dramatically during 2016 this may put pressure on Gilt yields, but I think above 2% the stock market will stall, leading to concern about an economic slow-down.
Sterling will continue to be torn between its desire to follow the US$ higher and the depressing pull of a weakening EUR. traded between 1.46 and 1.58 in 2015. The uncertain state of the EU and domestic political concerns make it likely that we test the downside. The 2009 low of 1.43 is not that far away. That it has not weakened against the EUR suggests that worries about the UK are matched by concern about the entire “Euro Experiment”.
The has outperformed the FTSE 100 since at least 2012. Technically it corrected 38.2% of the rally from the October 2014 lows to May 2015 highs. The FTSE 100, by contrast, broke down during the summer, taking out the October 2014 low with an almost perfect 23.6% extension to the downside. Since the summer the correction has been lacklustre. The spread, on this basis, looks likely to favour the mid-cap index. By other valuations the UK stock market looks neither over nor under-valued. A PE of 26 is high but interest rates are historically low, CAPE of 12.8 and a dividend yield of 3.7% are supportive. Stay long the FTSE 250 and add on a break.
First rate hike as early as May or August
So far, the outlook for UK economic growth remains solid. But inflation outlook remains subdued and uncertain. The minutes from the December MPC meeting showed the policymakers saw downside risks to inflation from protracted low oil prices, and weaker unit labor costs growth so far this year. Even though crude prices remain low, its downward pressure on CPI’s annual change will be smoother early 2016 than it was back in 2015, when prices fell much deeper from the preceding year – the so-called base effect. So we may see some gentle pick up in CPI early next year, if all else stays equal, and crude prices remain steady overall. Still, the BoE sees CPI below 1% until the second half of next year.
Other risk stirring up uncertainty is the looming EU referendum. Very much will depend on what news we read on the process of UK’s re-negotiation efforts with EU partners. The better the news, the less ammunition for anti-EU forces in UK, and more tools for Prime Minister David Cameron to stir public opinion towards Britain staying in the EU.
As regards monetary divergence, the Fed eventually ended the era of exotic policy in December. Much will now depend on how it proceeds with tightening cycles next year. Again, all is up to the data coming in. Even though the BoE said in December that it decides solely on the basis of UK inflation outlook, and not on ECB or Fed’s decisions, the fact the Fed moved off the extraordinary measures offers the BoE more comfort in following suit. But, again, all is about inflation and growth in UK. If inflation moves up close to the level the BoE expects towards the middle of 2016, which is around 1%, we could see the first rate hike as early as May or August, which would also coincide with the BoE’s quarterly Inflation Reports.
The naïve view of the UK for 2016 says that we followed the US into this mess and we’re following them out, so on that basis we should expect rates to increase not too far behind the Fed. That’s the naïve view for a reason, as the picture is a lot more complex than that. The first thing is the relative positions of our economies. The US economy took 3 years to regain its pre-cycle peak in output, the UK took 5.5. years. Furthermore, the sluggish pace of the UK recovery in the early years means that the US economy is now 10% above its pre-crisis level and we are just 6%. The caveat has been the labour market. The US was hit hard, the UK less so, but productivity was hit as a result.
For sterling, this will mean that further depreciation against the dollar is seen as I don’t see the BoE putting up rates until the tail end of 2016 at the earliest. Inflation remains subdued and the economy is likely to slow into mid-year, not helped by the uncertainty of a ‘Brexit’ referendum. Look for the to move the 1.45 by April, 1.42 thereafter. Against the , moves will be more constrained, but it should manage to appreciate as the Eurozone continues emerge from the current deflationary trap, but the 1.45 level should mark the peak for first half of 2016.
I think the yen could be the surprise currency of 2016. Many have been steamrollered by coming up with 20 reasons for the yen to be weaker, only for it to rally. I think 2016 will be one of those years. That could push back down to the 170 level, from 184 at the time of writing.
The fate of the in 2016 is likely to again rest more with commodity prices than it is with the strength of the UK economy. In 2015, the FTSE 100 spent most of the year as a serial underperformer because of weakness in heavily-weighted mining and oil & gas sectors which have been caned by plummeting metal and oil prices. Calling the FTSE 100 above 7000 in 2016 could be akin to calling a bottom in and prices, not an easy task.
Commodity supply is outstripping demand. The lack of commodity demand can be attributed largely to the slowdown in China. For the FTSE 100, it’s not just miners who are exposed to China but also Asian-focused banks like HSBC Holdings PLC (L:) and Standard Chartered PLC (L:) as well as luxury brands like Burberry Group (L:) who were experiencing their fastest growth inside China. If Chinese government stimulus can ease the slowdown in China’s economy, that will be a positive for the FTSE 100.
One area the FTSE 100 has some scope to rebuild in 2016 might be the banking sector. There could well be some more skeletons in the closet of money-centre banks but if the Federal Reserve gets the tightening cycle under way, the BOE could be soon to follow with higher interest rates, allowing better lending margins for the banks.
The housing market is nearing bubble territory so house price gains are not guaranteed in 2016 but it seems likely FTSE 100-listed house builders including Persimmon PLC (L:), Barratt Developments (L:) and Taylor Wimpey (L:) can continue to be beneficiaries of an improving UK economy, low mortgage rates and tight housing supply.
Gold to average at $ 1100 in 2016 but comes with a twist!
With no prospect of additional QE from the Federal Reserve, gold in USD () look set to head lower in 2016. Instead, the Federal Reserve is looking to normalise interest rate by doing a gradual hike. This will allow the USD to continue its appreciation, further increasing the cost of holding the that does not bear yield. The overall technical trend remain bearish and what many gold bugs hate to admit – gold has the potential to break below the psychological level of $ 1000.00 before we see any recovery.
As long as the global equity market remains buoyant, momentum buying will continue to favour lower gold prices. Given that TINA (There Is No Alternative), stocks buyback programmes and high valuations on EPS (Earning Per Share) can remain irrational and central banks seems to stand firm to protect a healthy stock market. If we see a mini correction in the global equity market, the rush to safe haven demand on gold will be very appealing even though the upside remain limited to 1160 – 1220 range. Should another crisis happen, we cannot rule out a big short covering move to higher prices.
Fundamentally, the recent low price in gold has affected many miners who are looking to cut back on extraction or opening up new mines. Surplus leads to deterioration on future prices despite a strong demand on physical gold from the likes of China, India and Russia. There is a concentrated effort among miners to reduce availability but mines that were invested during the boom years will remain operational even though the cost of production is higher (loss making).
Considering all the potential scenarios that could happen in 2016, an average price of gold at $1100 may not do it any justice. However, we expect a more volatile year in the price action with potential of a new low.
Another difficult year ahead for the Gold bugs
Gold moves into 2016 still under a sizeable bearish pressure and the tightening of monetary policy by the Fed should ensure it is another difficult year ahead. The continued subdued outlook for inflation at a time at which interest rate divergence is beginning to take hold will act like a millstone round the neck of any rallies. I expect a choppy year ahead and even though the technicals are pointing towards a potential test of the crucial $1000, however I do not see there too be too much further downside. Trading below $1100 will mean that some of the supply will begin to fall out of the market and this should begin to be supportive. Furthermore there are still some big central banks buying (notably China and Russia) so I expect a trading range between $1000/$1200 for the year.
Volatility assured but little to cheer for the bulls
In addition to the strengthening dollar, with the chaos and disorganisation of OPEC unable to affect global production levels, the oil price is going to remain under pressure in 2016. However it is as much of a problem with demand as it is supply and with China continuing to rebalance its economy the demand side of the equation is going to struggle once more. It is difficult to see a bottom at the moment with all technical indicators bearish and a test of the 2009 low at $36.20 likely. Unfortunately for OPEC, the lower oil price is driving a leaner, meaner producer of US shale oil which is driving down the cost of production. The question for 2016 could be whether the social unrest in countries such as Venezuela cause a fracture within OPEC, something that could further increase production levels and depress the oil price. I see the price holding below the key $70 resistance and will struggle to breach even $55 on any rebounds.