The Australian equity market is set to experience further volatility in 2016, with financials set to play a large role in determining market performance, says IOOF.
IOOF chief investment officer Steve Merlicek said in addition to offshore factors, the success or otherwise of the Australian equity market will largely be determined by both financials and mining.
According to Mr Merlicek, the financial sector will be dependent on the outlook for banks. He said on all fronts – particularly housing, bad debts and new prudential requirements – there will be headwinds for most financial institutions.
“On all these fronts there are headwinds – but no significant collapses are expected and the current dividend yield is expected to be maintained,” he said.
Mr Merlicek predicts more volatility in 2016, sighting the fact that valuations across asset classes are becoming stretched.
“We are probably entering the third phase of the investment clock, characterised by greater volatility.
“In this phase being active and nimble is more important, though good returns can still be made."
Mr Merlicek suggested that investors move away from indexation and growth strategies, with high-yield strategies also likely to come under pressure if credit spreads “blow out”.
In terms of international equities, Mr Merlicek said the sector is “fully to over-valued”.
“It is unlikely that double-digit returns will occur from an Australian investor perspective as the Australian dollar is unlikely to have the same declines that occurred in 2015,” he said.