Staying dynamic: Multi-asset investing in 2016

March 22, 2016 Categories: Portfolio Corner
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Volatility

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 2016 Global Annual Outlook.

Key themes our investment strategists expect will influence markets in 2016

  • We think volatility is here to stay. But it has been artificially dampened over recent years, which has led many to expect it to remain low. We disagree.
  • 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 (and did quite effectively back in August).
  • 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. In December 2015 the Fed finally began raising rates, the European Central Bank opted for a moderate approach to additional easing and, as of late January 2016, the Bank of Japan opted for negative interest rates.
  • 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, and their government stands at the ready to introduce additional stimulative measures, 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 strengthening dollar on exports has the market jittery about prospects for U.S. equity market returns.

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

For more on my views regarding multi-asset investing in 2016, see this video.

The bottom line

In the midst of volatility, it is important to have a disciplined process, a steady hand, and a willingness to express conviction when others panic. We believe expected market conditions in 2016 will require us to manage risk, to dynamically take advantage of volatile investor sentiment in a disciplined way, and remain committed to our fundamental principles through our multi-asset investment approach.

Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than US and longer-established non-US markets.Strategic asset allocation and diversification do not assure profit or protect against loss in declining markets.

Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Past performance does not guarantee future performance.

This material is not an offer, solicitation or recommendation to purchase any security.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

Russell Investments is the owner of the trademarks, service marks and copyrights related to its indexes.

Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is a subsidiary of London Stock Exchange Group.

Copyright © Russell Investments 2016. All rights reserved.

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