Staying dynamic: Multi-asset investing in 2016

Editorial Note: This post originally appeared on our companion blog, Helping Advisors, on March 22, 2016.

So far this year, between commodities like oil, uncertain news out of China, and some significant roller-coaster action in U.S. equities, it’s been a wild ride. But information can help provide us the power to stay calm in these volatile markets. Based on the careful research and strong expertise of our investment strategists, here are our thoughts on what to expect, based on our latestGlobal Market Outlook- Q2 Update, released earlier today.

Key themes our investment strategists expect will influence markets in 2016

  • We think volatility is here to stay. Partially as a result of our view on volatility, we are cautious on overall risk. We entered the New Year underweight risk across many of our multi-asset portfolios. Downside protection strategies, where possible, remain a tool we are prepared to use.
  • Be a risk manager, not a risk taker. We said it in 2015 and we’re saying it again in 2016. Just as volatility had been artificially dampened in the recent past—due largely to coordinated stimulative policies by central governments around the world—the current growing divergence in central bank policy is contributing to the opposite.
  • The good news is that this divergence can lead to potential opportunities to add value through measured dynamic asset allocation, even if overall asset class returns are modest and market volatility persists.

Investment opportunities our multi-asset portfolio managers see in 2016

  • We believe that European equities will significantly outperform the global average, and therefore we are currently overweight across all our multi-asset portfolios.

Consumers in Europe and corporations have benefited from recent lower oil prices. As noted above, European governments have moved from extreme austerity to stimulating their economies. And finally, European exporters benefit from the tailwind of a dramatically cheaper Euro, which has devalued more than 30% in the past 15 months.

  • We also believe that Japanese equities will outperform.

Japan has had the highest corporate earnings growth of any other country over the past two years, a fact that not many investors recognize. Their economy should reap significant benefits from the dramatic reduction in oil prices. Additionally, Japan’s government stands at the ready to introduce additional stimulative measures (like they did with their introduction of a negative interest rate earlier this year) should the need arise.

  • Conversely, we are more cautious on the outlook for U.S. equity performance.

Concerns about corporate earnings, the removal of Fed liquidity, and the impact of a potential end of the bull run on the U.S. dollar on exports has the market jittery about prospects for U.S. equity market returns.

  • Emerging markets amid the strong U.S. dollar, falling commodity prices, and China’s slowdown, but are moderately cheap.