Standard Life Investments (SLI) has predicted that 2016 will be a challenging year, with different countries and asset classes at different stages of the investment cycle.
SLI head of global strategy, Andrew Milligan, said a very selective approach is needed in the current environment. Milligan tipped developing markets over emerging market assets, and said he preferred Europe or Japan as they will develop from lower commodity prices and improving economies. “Conversely, we are short duration in government bonds, and underweight in stock markets which are relatively expensive or too exposed to commodity pressures, such as the US or developed Asia,” he said.
Milligan said that SLI lowered risk in its multi-asset portfolios in 2015, due to concerns about valuations and rising financial stress. He said that key triggers for risk exposure will be the US dollar’s strength, China’s economic policy stimulus and the impact of the US Fed’s tightening on highly-indebted EM countries. On equities, Milligan said: “We favour European equities, reflecting more favourable prospects for European earnings as top line sales recover while costs are contained.” In fixed income, Milligan said SLI had short duration in its portfolios and light positions in US, UK and Japanese government bonds. This is offset by a heavy position in European debt. He added: “We also prefer to move up the capital structure, holding more investment grade corporate bonds. Default risk is rising but investment grade valuations are attractive as long as no recession appears.”