The second half of 2015 was difficult for markets. The start of 2016 has not been any easier, with the yuan's devaluation reigniting concerns over China and global growth. The move comes at a particularly sensitive time: in addition to an uninspiring macro backdrop, the first Fed hike in nearly a decade has added to market anxiety. Oil prices fell to 12-year lows and risk assets sold-off broadly. The magnitude of the sell-off outside of China appears exaggerated relative to macro fundamentals. We expect a modest rise in global growth in 2016, from the slowest pace post crisis in 2015. The US and European cyclical recoveries continue, and we expect average growth to remain stable, yet unspectacular, in both regions. Other large advanced economies should see growth accelerate. Meanwhile, the outlook in EM remains challenging, but less deep recessions in Russia and Brazil and an acceleration in India should see growth pick up. As for China, while the gradual deceleration continues, fears of a sharp slowdown are overdone. Hardly an outlook worthy of the worst ever start of a year for the S&P500.The macro impact of the market sell-off is unlikely to push central banks into changing course. The Fed should continue its gradual rate rises, with market pricing converging toward Fed guidance sometime this year. In the case of the ECB, further easing in the near-term is possible given the recent decline in oil prices, but a resilient growth outlook should keep the ECB on hold. Rather, absent further shocks there is more risk in 2016 of focus shifting to discussing a reduction in the pace of easing. Tactical rebounds in risk assets are possible in the short-term, but a sustainable recovery requires China uncertainty to fade. More generally, markets in 2016 are likely to remain choppy. Dollar strength should continue, though at a more modest pace. US and European rates should rise modestly. In equities, we see 10-15 per cent upside for the US and Europe with both earnings growth and slightly higher valuations contributing to index gains. US credit, especially high yield, continues to suffer from high commodity exposure, and Europe credit should outperform on more solid fundamentals. EM assets will remain under pressure, though we do not expect 1980s-90s style EM crises.David Folkets-Landau, Group Chief Economist
The document includes a 3-slide review of 2015 as well as our macro and markets views for 2016. We include a quick run through the key themes for markets in 2016.
p10: our take on the sell-off
p24: political risk in Europe
p35: China FX policy
p36-37: oil story
p39: asset class views summary [more]