2015 has been a year full of important events in the financial markets. We were able to discuss with you some of the main stories:
- In June the Chinese equity bubble started to burst. In July we gave you insights on this “beautiful” phenomenon, bubbles, using China as an example. Find out more: The Chinese Bubble explained
- Who can forget?! On July the 1st Greece became the first advanced economy to default on an IMF payment, to read more: The Greek mess: the debt crisis untangled
- This month we saw the first rate hike of the FED since the big financial crisis of 2008. Back in august we gave you a brief on what will be the consequences of a FED rate: The FED rate hike is about to happen, So what?
- We felt that 2015 was the year in which robo-advisers became mainstream, so we also wrote a piece on this: Millennials investing: The birth of Robo-advisers
- In August, China surprised the world with a hefty devaluation of Yuan bis a bis dollar. Since we felt that this was the last chapter in the Currency Wars book, we made a 3-post series about Currency Wars. You can check the opening post here: Yuan Devaluation: Currency Wars Revisited
- Volkswagen’s emission scandal also caught our eye, and we used it to explain how the markets sometimes have inefficiencies that can be exploited without incurring in vast amounts of risk. If you want to check it out: Volkswagen Scandal – Trade Opportunities
- Finally, our last article of the year focused on the reasons why Oil suffered such a major correction. We make an argument to reason what oil prices will most likely do in the short and medium-term. You can read this here: Past, Present, and Future of Crude Oil
So, what are going to be the main events and developments from 2016 that can determine the future of the financial world? – We are going to add some predictions. Please, don’t take them too seriously, no one knows what is going to happen in the future, not with a 100% certainty anyways.
Here, The 5 economic shapers of 2016:
FED policy normalization
As we all know, the FED is planning to increase the rates during the following years in a progressive and fashionable manner, and always paying attention to what the data says. This means that better news from the labor market, house market, manufacturing… will translate into further and faster rate increases. This also means that if the U.S. suffers an unexpected turn on events and it enters a recession next year, as a major forecaster Marc Faber predicted this year,
Find his prediction here – U.S. on The Verge of Recession – Keep in mind that this gentleman was able to predict the 1987 crash and the rise of commodity markets in the 2000s. However in 2012 he said that there was 100% chance of a global economic recession in 2013, and last year he predicted that gold prices will end up 30% higher… So he hasn’t always been right. No forecaster has ever been!
the FED might be completely stopping the normalization, or even decrease rates again. There is data backing up an acceleration of growth in the U.S. and there is data backing up a possible recession. Whatever it is, it is going to be fun to watch. As you can see, the S&P 500 looks like it is ready to take a big dive….
Maybe it is not that bad to keep your guns loaded (keep a bit of cash) in your accounts to enter the market at lower levels. This receives the name of “timing the market” boys and girls, and it is a whole different animal, in other words, quite hard to do!
Our prediction
The FED rate will end the year between 0.75% and 1.5% and no recession will have hit the markets. We might see is a hefty correction… crash is too big of a word, but we definitely think that after the latest decrease in company profits (per-share profits of S&P 500 stock index fell an estimated 6% this year), we are seeing a way too overpriced U.S. equity market. A 15% to 25% correction will make sure that markets stay attached to reality and don’t start going to dreamland. We do not want to get another huge bubble.
Global Growth
There is a lot of uncertainty in this realm, and we need to see solid quarters from all the major economies to start getting the confidence levels up. In 2015 Canada entered a recession, as well as Brazil and Russia. Japan, that was thought to have entered a recession, was able to dribble it with a data revision that meant that GDP expanded in the third quarter of this past year. In the other hand, every single developed country saw its GDP increasing in 2015, with special mention of Ireland 7.04% and, from the big economies, Spain, with 3.06%. In the developing world department China kept with its slow down, and saw its GDP growing at a modest (if we see the recent past) 6.95%. In the other hand, India surprised to the upside posting a 7.30% growth, and becoming the fastest growing country in 2015. If Narendra Modi’s policies are successful we might soon be talking about the new growth king!
China is the second largest economy in the world. A farther slow down of its growth could hurt the whole economic system. In the article “Dueling Financial Forces to Test Markets in 2016” you can read that
“China’s combined private and public debt have surged to 244% of gross domestic product from 148% in 2008, even as growth decelerated to an estimated 6.8% in 2015 from 9.6% in 2008.”
Actually this is not the only quote you should read from this article. I think that you should go ahead and read the whole thing regarding China, since it perfectly explains Beijing’s priorities for 2016 and the possible risks.
Our prediction
This is the least “scientific” prediction of all of them (we barely know anything about China!). However, for the sake of the new year let’s still give one: We are optimistic about China, we feel that us westerners tend to always underrate what we don’t understand. So… we expect China to be successful in its move towards a more consumer spending and service economy. Maybe the growth of the next couple of years (so yes 2015 is there), will disappoint and the markets might see some big volatility due to further devaluations of the Yuan, but in the long run we expect big things from the sleeping giant :).
The Oil Market
Since Saudi Arabia started to allow oil to flow into the markets with no cap, we have seen oil prices dropping to the mid $30s. You may think that this was a development that already played out, and that oil will be quite in 2016. No Sir, and Madame, the truth is that 2015 was just the beginning. The Saudi’s play is going to shape the oil industry for the foreseeable future. If you want to know more about the situation check out our latest post on oil prices (you have the link on the top).
Our prediction
For all the reasons that you can read in the above-mentioned post we believe that oil will stay most of the year between $20 and $40 pb.
Commodity Prices
The slowdown of the biggest commodity consumer, China, has tremendously impacted the commodities market. Iron Ore has seen its value depreciated over 40%, from $70 in January. This is due to the build up in steel inventory after the Chinese property market went flat.
Precious metals have also suffered quite a bit in the past year. Gold and silver , both, are down around 10% in the year. This non-yielding assets that incur in holding costs might seen even worse days as interest rates start increasing.
Copper dropped over 20% in the year. In this case the chain of production cuts and mine closures during 2015 might translate into supply contraction and price increase for 2016.
Grains This chart represents the prices of wheat, corn, and soybean for one bushel for 2015. As you can see the drop in prices has been considerable.
The crops where even bigger than what market analysts expected, hence prices tanked. Oversupply leads to decrease in prices, and this is exactly what happened this year. If “El Niño” will hurt this year’s production is yet to be seen, but even in this case there is a huge build up that can mean stagnant grain prices even if the weather plays a big role.
Our Prediction
We are bearish in grains and precious metals. But, we feel that Iron Ore and Copper have room for upside surprises and if they happen we might see shorts getting out of the way which will bring volatility and bigger moves.
European Geopolitical Risk
Here there are two main developments that deserve our attention. One is the possibility of a “Brexit,” and the other one is the increasing power gain of socialist, leftist, and anti-austerity parties in the South of Europe.
Brexit – We don’t know if the vote for the U.K. leaving Europe will come in 2016 or in 2017. However, since there is a possibility that it will happen in 2016 we think it’s worth to mention. The exact implications of an event of this magnitude should be a post, or a few, of its own. Nevertheless, do not doubt that this will be a major topic of discussion during this new year.
Leftist Parties taking control – We have all seen what this type of parties are capable of. Greece defaulted on a payment to the IMF in 2015, and the country run out of paper money.
The problem is that it’s not only Greece and Syriza. In Portugal the moderate socialist party aligned itself with the communist party in order to overturn the conservative government just 11 days after its institution. In Spain, the conservative party had majority, but not big enough to rule alone, this is why it is looking more possible a coalition between moderate leftists and the more radical ones to rule the country.
All the more radical leftist have in common that they want to restructure their debt towards the European Union… After what happened in Greece, we can imagine what is in store for Portugal and Spain…
These developments could destabilise Europe even more and end up breaking it. The South cannot feel that the North is taking advantage of them, but the North cannot feel that they are working for the south. Crazy situation this one!
Our Prediction
We will see this radical powers gaining more power and governing in both Portugal and Spain. We will see some initial destabilization and fight against the Troika (European Commission, European Central Bank, International Monetary Fund), but after some pain these parties will understand that they shouldn’t put their citizens over unsustainable levels of pain just to meet their electoral promises and will slowly but firmly back down.
You see! We have many things to look forward in 2016, let’s do it together ok?
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