Investors will need to re-evaluate their investment strategies, including their diversification approach, going into 2016 as the global economy is set to experience a “low and slow” growth period, says State Street Global Advisors (SSGA).
In the recent Global Market Outlook for 2016, SSGA indicated that in expectation of another year of volatility, investors shouldn’t over-diversify and should instead look to balance protection with performance.
“Investors will need to learn to live with volatility and make an allocation to growth assets with an eye on the long term,” the report stated.
The report pointed out that an interest rate rise by the US Federal Reserve may accelerate the capital outflow from emerging markets, prompting more currency weakness in the sector.
SSGA senior managing director and head of investments, Asia Pacific, Kevin Anderson said: “The downside risks to growth are seen as emanating primarily from the emerging markets, so the anticipated improvement there is far from guaranteed.”
SSGA said that in order for growth in emerging markets to be reignited, Chinese growth and commodity trends need to stabilise.
However, SSGA expects Chinese economic growth to fall short of expectations. The report forecasts China to grow at 6.0 per cent in 2016, down from an estimated 6.5 per cent.
“Our caution is prompted by the persistence of many structural challenges in the Chinese economy, including excess manufacturing capacity and persistent deflation.
“Each investor should weigh the opportunities against the risk, given their own level of appetite, but we would advocate taking a long-term view, especially while there is uncertainty,” Mr Anderson said.
The report concluded that throughout 2016, developed markets will remain the optimal asset class for returns.
Commodity and interest rate asset classes, according to SSGA, will likely underperform. Conversely, consumer-related sectors and asset classes with a risk-adjusted yield will outperform.