Russell Investments 2016 Global Market Outlook Q2 Update
- Central bank policies and anxiety drive global market volatility
- Equity upside remains with modes values available in Europe and Asia
SEATTLE, March 30, 2016
Russell Investments released its 2016 Global Market Outlook – Q2 Update, offering the latest economic insights and market forecasts from its global team of investment strategists, which help guide the firm’s multi-asset portfolios and services.
The firm’s strategists expect business cycle support for global equities to weaken and government bond prices to remain rich in 2016, as the difference between hawkish (U.S.) and dovish (Europe, Japan) monetary policies drives market volatility. Regarding China, the team believes the economic downturn still appears to be heading for a “soft landing,” but if there is a time when skeptics will be proven correct, this is the year.
“Our investment strategy process is moving away from 'buy-the-dips' toward 'sell-the-rallies,' though we still see low single-digit returns globally for 2016," said Andrew Pease, Russell Investments’ global head of investment strategy. "With downside risks for equity markets outweighing potential upside scenarios, we expect to maintain a cautious outlook until business conditions improve.”
In the U.S., the strategists believe two Federal Reserve rate hikes during 2016 are likely to help push the 10-year U.S. Treasury yield to the 2.3% range over the next 12 months. As for U.S. equities, they now have a higher probability of holding to low single-digit returns for 2016, versus a projection of low-to-mid single digits at the beginning of the year, as a result of expensive valuations and waning price momentum. The good news is that even with gross domestic product (GDP) and corporate profits weakening, the likelihood for a near-term U.S. recession remains low.
“We have an underweight preference for U.S. equities in global portfolios as lackluster earnings and rich valuations suppress total-return expectations to near-zero over the next 12 months,” said Paul Eitelman, investment strategist, North America. “While we do see more prevalent downside risks for the U.S. following the first quarter of 2016, the lack of major imbalances in the U.S. economy makes a recession this year unlikely.”
In contrast to the U.S., eurozone equities are being helped by quantitative easing (QE) and offer some reasonable valuations that are preferred by the team of strategists. However, further QE announcements are not having a big impact on either the euro or the Japanese yen. As a result, the team believes the U.S. dollar (USD) bull run is expected to run out of steam this year.
Russell Investments’ global team of investment strategists determines its global outlook through a clearly defined process that is based on the building blocks of business cycle, valuation and sentiment. Their current global market perspectives are as follows:
- Valuation: The early first quarter 2016 pullback in equity markets has improved value across developed markets. The U.S. is still rated as the most expensive, as of March 30, 2016, while Japanese and European equities are slightly cheaper and emerging market equities are moderately cheap.
- Business Cycle: The cycle is becoming less supportive for equities. The strategists believe Europe and Japan still have the most favorable cycle backdrop due to supportive monetary policy, weak exchange rates and the potential for rising profit margins. The cycle is now neutral for U.S. equities given the risks around earnings-per-share (EPS) growth and the potential for further Fed tightening. The cycle is negative for emerging markets amid slowing growth, export weakness and a deteriorating outlook for EPS growth.
- Sentiment: Price momentum is negative in every region, which is a negative sentiment indicator. Contrarian indicators, however, still point to modestly oversold conditions, providing a counterbalance to negative price momentum. Overall, sentiment is neutral across the major regions.
Updated regional exposure forecasts
The strategists also updated their forecasts across global regions and asset classes for 2016, as of March 30, 2016, including:
- Asia-Pacific: The team expects low absolute returns and high volatility from regional equities. Bonds in the region are at extremes of expensive valuation, while the business cycle is a mixed bag.
- United States: The team has an underweight preference for U.S. equities in global portfolios and expects total returns near zero over the next 12 months.
- Eurozone: Russell Investments maintains an overweight preference for eurozone equities and has returned to an overweight position for peripheral bonds. Slowing global growth and global earnings expectations pose worries, but the team believes strong eurozone fundamentals carry the day, for now.
- Currency: The team foresees a plateauing USD exchange rate. The yen’s attractive valuation and defensive characteristics make it the strategists’ top currency pick. The team also believes a significant selloff in developing country currencies would be a buying opportunity.
- Fixed Income: The outlook for government bonds remains poor with negative 10-year Treasury yields in Japan and close to record lows in the U.S. and Europe; however, the outlook is less negative as a result of the weakening business cycle.
For more information, please see the 2016 Global Market Outlook: Q2 Update.
About Russell Investments
Russell Investments, a global asset manager, is one of only a few firms that offers actively managed multi-asset portfolios and services which include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals working with their advisors—using the firm’s core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures to help each achieve their desired investment outcomes.
Russell Investments has more than $241 billion in assets under management (as of 12/31/2015) and works with more than 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell Investments has $2.2 trillion in assets under advisement (as of 6/30/2015). The firm has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell Investments also traded more than $1.7 trillion in 2014 through its implementation services business.
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