In order to determine our investment allocations in client portfolios, we look at investment fundamentals like cost, risk, efficiency, etc. We also consider how the funds will be affected by key economic themes each year. For 2016, we are considering how the following three themes will affect our investments:
- An economic slow-down in China. After booming at near double digit GDP growth since becoming “capitalist” more than a decade ago, China’s insatiable growth and gobbling up of the world’s resources has begun to slow to a more normal 4-5% growth rate. This has caused reductions in their purchasing of goods from abroad, namely natural resources like iron ore, copper, and oil. We can predict that energy and resource funds will be adversely affected by this slow-down. But aside from what to avoid, what should we invest in given China’s slow-down? Municipal bonds are a good place to hide, as well as U.S. Treasury bonds. But, the secret is out, as both have performed well over the past 6 months.
- Continued low oil prices. We’ve seen oil go from $60/barrel to around $30/barrel in six months. With Iran production coming into world markets, and OPEC showing no sign of cutting production, U.S. drillers have had to close up shop and wait for prices to become stabilized, if not high enough to justify the cost of drilling. The bright side is that consumers will keep more money in their pocket as prices at the pump remain low. Emerging markets and foreign resource economies will be hurt most. However, global stocks should benefit from low oil prices (with the exception of the energy sector), and alternative strategies like long/short equity will be good places to invest.
- Presidential election year. The 2016 election is shaping up to be the most vexing—and polarizing—in history. Markets prefer predictability, and with “outsider” candidates like Trump and Sanders gaining traction, markets will be extra sensitive (volatile) with fears that Wall Street’s gravy train might be derailed. U.S. stocks and bonds will be jittery if Clinton or Kasich can’t take a commanding lead.
Given this uncertainty, we like high quality bonds (especially munis), international stocks, and long/short equity strategies. Maybe it’s time to reduce U.S. stock exposure until after the election?
Don’t despair, we’re happy to handle it for you. Sit back, relax, and enjoy the show.