The outlook for 2016

As we peer into the year ahead, investors are wondering what the next twelve months will bring. 

London Eye
Source: Bloomberg

The year 2015 has seen a commodities crisis, fresh Grexit worries and the first Federal Reserve rate hike in nine years. We therefore present a look into 2016, examining the current state of the economy and various asset classes.

The world at the end of 2015

The global economy is a mixed bag as the year draws to a close. The US is seeing good growth, followed by the UK, but the eurozone is still sputtering. In emerging markets, the picture is not as good, with China perhaps the most worrying element.

In global manufacturing, as the chart shows, activity has been declining for some time now, with the US, China, UK and the eurozone all seeing a drop in manufacturing PMIs since the highs of 2013-14. Slowing business is not such a concern for the US, as the Fed rate hike illustrated, since manufacturing forms a smaller part of the American economy than it did in the 1980s, which was the last time that the Fed increased rates when manufacturing activity was below 50. 

Global manufacturing activity slowing

In the service sector, the picture is not quite as bleak, with all four regions seeing an expansion in activity (i.e. where the index remains above 50).

In fact, activity in these areas remains stable, with China’s weakness being a point of concern. However, policy in China has been aiming at boosting the non-manufacturing part of the economy as it moves towards a greater level of development.  

Services activity remains steady

While it has recovered from the depths of the financial crisis, consumer confidence is still less than stellar, except in the US, where it has been steadily rising.

This recovery in confidence has still to be matched by a strong rise in wages, but that is beginning to be seen in both the US and the UK, which offers hope that 2016 may see a good period for stocks focused on consumers and household spending. 

Consumer recovery still in progress

As the Fed and the Bank of England have learned, inflation is the missing piece of the puzzle. Price growth has been anaemic at best in most of the developed world, with deflation (or negative inflation) seen for short periods.

The puzzle of how to tighten policy when price growth is so weak has exercised policymakers for over a year now. Despite the first Fed rate hike in nine years, it will continue to bedevil central banks as commodity prices keep declining.

Whither inflation?

Overall, the global economy is moving out of the emergency room, but has still to reach full health. As we head into the New Year, the ongoing improvement in wages (partly thanks to ‘full employment’ in the US and UK) will provide hopes of a consumer-led boost in the developed world. However, barring a sudden spike in inflation, it looks like policy will remain generally accommodative for the foreseeable future.

Stock market comparisons

It is a given that yields will remain relatively low throughout the year to come, at least outside of stock markets. With the European Central Bank still easing, and the Fed’s tightening process yet to hit its stride, equities will continue to maintain their appeal.

While each market needs to be judged on its merits, a quick overview can help flag up potential areas of value and/or growth. The chart below, using data from Bloomberg, summarises the state of play for global markets.

Global markets


Name P/E Price/book Div Yld (%) Price/Sales EV/EBITDA
Hang Seng 9.58 1.18 3.9 1.7 8.05
ASX 200 19.03


6.79 1.81 13.27
CAC 40 20.97 1.42 3.23 0.97 9.41
FTSE 100 27.7 1.73 4.72 1.1 10.86
Eurostoxx 600 23.54 1.8 3.64 1.16 10.44
DAX 23.04 1.69 2.77 0.8 7.09
Nikkei 19.71 1.69 1.71 0.95 9.88
S&P 500 18.01 2.73 2.17 1.79 12.25


Some interesting points stand out from the above table. Both the FTSE 100 and the ASX 200, with their heavy contingent of mining names, have dividend yields that would seem to be overextended given the sector’s travails. Chasing income in these markets might not prove to be the best idea.

On a price-to-book basis, the S&P 500 begins to look overvalued versus other markets, with its 2.7 multiple far above the likes of the DAX and the Hang Seng.

In fact, from the above figures it looks like the Asian markets of the Nikkei and Hang Seng seem to have the best combination of value and yield, with relatively low PEs and decent income from dividends. This may help to offset continuing concerns about the Chinese and Japanese economies, plus the impact of Fed tightening on Asian emerging markets.

European markets look to be trading on somewhat pricey earnings multiples, but current price-to-book levels suggest that they are not overly expensive, with the ECB’s QE programme providing another reason for optimism where the eurozone is concerned.

A look at the UK market

The year 2015 has been dominated by the fall of the mining sector, along with carnage in the oil market. With these key areas firmly out of fashion, what might prove interesting for the year ahead?

UK sectors


Name QTD Total Return 5yr dividend growth 5 yr diluted EPS growth
Telecommunication Services  7.19% 1.6910 6.73%
Utilities 0.70% 2.5201 14.51%
Energy 3.37% 5.6106 -1.08%
Health Care  5.56% 7.0866 16.59%
Consumer Staples 2.93% 7.3264 10.10%
Financials 3.37% 10.8521 27.43%
Materials -6.00% 12.1699 14.21%
Industrials 4.82% 13.2780 15.74%
Information Technology 11.15% 19.9645 25.17%
Consumer Discretionary 3.14% 20.9544 232.72%


There are three ways to look at the data above, momentum, dividends and earnings growth. For short-term traders, we can see that the IT and telecoms sectors have enjoyed the strongest percentage return over the last quarter, and this may well continue into the first three months of 2016.

A contrarian view might be that the materials sector will enjoy a bounce after its heavy drop over the last three months, but the likelihood is that bearish momentum will continue here.

Those with a longer-term view might appreciate a look at the yield element, with the consumer discretionary and IT sectors seeing the strongest growth over the past five years. Such a record of increasing payouts remains an attractive element for investors in this low-income world.

Finally, a number of sectors have seen earnings growth that is well above average for the UK market. Again, consumer discretionary tops the list, although much of this has been down to Compass Group, the catering firm. However, financials, IT and health care have all seen consistent improvement, and should be viewed as candidates for portfolio allocation, especially if combined with rising yields and bullish price momentum.

One last area that is often worthy of inspection is a quick look at the most shorted names on the London market. The top fifteen are as below.

A shorter’s paradise?



  % short
Carillion 19.3
WM Morrison 13.6
Sainsbury's 12.7
Home Retail 10.9
Ocado 10.2
Petrofac 9.8
Ashmore 9.3
Hansteen 8.3
Electrocomponents 7.9
Tullow Oil 7.7
Lancashire Holdings 7.6
Drax 7.5
WH Smith 7.5
Globo 7.4
Aggreko 7.4


Some obvious names stand out here – supermarkets have been very popular among bears over the past year, with both Sainsbury’s and Morrisons regularly topping the list. Also of note are Home Retail and Ocado, which suggests continued negativity about the prospects for UK retail into 2016.

Finally, it is no surprise to see Petrofac Ltd and Tullow Oil on the list, with perhaps the interesting point being the absence of major mining names among these firms.


The year 2016 promises to be very interesting, and while it is a fool’s game to make predictions, it helps to be well-prepared with data on the fundamentals for economies and stocks. Sentiment will continue to play a major part, but the above summary should prove useful in helping to sort some of the wheat from the chaff. 

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