In a 2016 Outlook Markets Insights report, JP Morgan Asset Management market strategists Stephanie Flanders and Kerry Craig said the double-digit returns of prior years may be a thing of the past.
However, an environment of “decent but unexciting growth in the US and other large developed economies” suggests investors should tilt their portfolios in favour of risk assets over core fixed income in 2016, said the report.
“In a cooling Australian economy leaning towards international rather than domestic equities also makes sense,” said JP Morgan Asset Management.
With the eurozone less advanced in the economic cycle, there is also scope for Europe to continue to outperform the US, said the report.
“Meanwhile, Japan was the best-performing developed market in 2015. That looks less likely in 2016, especially if the Bank of Japan decides that the economy is doing well enough to manage without further easing,” said the report.
Money has been flowing out of emerging markets and US managed funds and into Europe and Japan in 2015, said JP Morgan.
“We may see this trend continue in the first part of the year, if the hoped-for recovery in U.S. corporate earnings does not materialise and investors continue to be worried about the world’s economic momentum and the adjustments under way in emerging markets,” said the report.
If global growth worries recede and US markets continue to react favourably to higher interest rates, investors could find opportunities in undervalued assets in emerging markets and energy, said JP Morgan.
“But the prospect of lower returns and higher volatility at this more mature stage of the cycle probably strengthens the case for increasing exposure to alternate asset classes, as a source of both portfolio diversification and – potentially – downside protection,” said the report.
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