SSGA publishes 2016 market outlook report

Dec 2nd, 2015 | By | Category: ETF and Index News

State Street Global Advisors (SSGA), the asset manager behind the SPDR range of exchange-traded funds, has published its market outlook highlighting key investment themes for 2016. The outlook predicts low steady growth during the course of next year, but cautions that the heightened volatility that began in August may continue to linger. SSGA suggests that investors consider re-engineering their core portfolio allocations to weather volatile markets, a strategy which could be implemented through ETFs.

SSGA urge core ETF reshuffle, according to 2016 market outlook report

State Street’s market outlook report for 2016 suggests sustained volatility could favour low beta strategies.

Dan Farley, chief investment officer for SSGA’s Investment Solutions Group, commented: “We believe that volatility is here to stay for a while driven by geopolitical and structural factors. The balance for investors is the need to maintain some level of exposure to growth assets. We have seen a big trend in investors wanting strategies that manage the downside but allow them to participate in the upside.”

The research supports seeking out ETFs exhibiting low betas while maintaining an appropriate mix of asset classes. Growth opportunities may require extensive searching under these conditions but focusing on diversification and evaluating the potential for portfolio drawdowns may help to protect wealth in the case of a global stock market rout.

Given the paper’s preference for a low beta strategy, the role of smart beta ETFs may rise in prominence during 2016 as investors seek out ways to sharpen their returns while managing risk. By integrating factors such as value, quality and size, one may be able to boost the return of their portfolios while still maintaining a strategic asset allocation that is suitable to the conditions of the market.

Ric Thomas, global head of research at SSGA’s Investment Solutions Group, added: “The low and slow environment is forcing investors to challenge the whole asset management framework. Targeting those factors that you believe in can bring rewards and also help improve your active management allocations.”

In the US, investors may also choose to boost their active allocation performance by tilting their equity exposure to those sectors more likely to outperform in an environment of normalising interest rates. Although the timing of rising rates is still being hotly debated, an allocation to the consumer discretionary, real estate and financials sectors may prove beneficial when rates move off zero. Through its Select Sector SPDRs range, SSGA is the leading provider of US sector ETFs.

Concerning European equities, SSGA posit the underlying market is being supported by fundamentals such as quantitative easing, a weak euro, low energy prices, low material costs, and low interest rates. They expect small cap exposures to outperform but uncertainty still exists, raising the case for tactics such as a managed volatility strategy that provides growth while minimising downside risk.

“A feature for much of the past two years has been the rise in uncertainty around China, volatile commodity prices and low central bank interest rates,” said Bill Street, head of investments, SSGA Europe. “This has resulted in a somewhat disjointed rally in riskier assets that has lifted markets far above the levels of 2009; however, we believe that there are still opportunities at current valuations for both investment grade and high yield debt to reward investors.”

Credit fundamentals are currently robust on both sides of the Atlantic with strong US corporate earnings while those of their European counterparts gather pace. Also, continued quantitative easing in Europe sets the stage for good upside potential on the continent. Recent trends in merger activity has favoured equity-funded deals, a feature which has boosted cash balances of issuers and prompted the retirement of debt. Both factors further boost the fundamentals of the credit market. That being said, investment grade fixed income exposures with moderate aggregate duration may prove a better choice as next year will almost undoubtedly feature rising interest rates.

Growth in emerging market is predicted to be moderate next year with fundamentals such as return-on-equity and discounts at multi-year lows. Factors such as a possible Chinese hard landing, movements in commodity prices, exchange rates, and structural reforms will all play significant roles in any potential rally. A Brazil-focused exposure may outperform on the back of a successfully executed Olympics tournament, although investors are still advised to maintain potential drawdowns as a key focus of portfolio construction.

George Hoguet, global investment strategist for SSGA’s Investment Solutions Group, said: “Led by Brazil and Russia, growth in emerging markets is expected to accelerate from 3.6% in 2015 to 4.2% in 2016. However, risks are to the downside, reflecting uncertain economic and financial conditions in China, potential negative spillovers from a gradual rise in US interest rates, and slowing world trade.”

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