Cyclical and Systemic Factors Drive 2016 Outlook

Research from MainStay Investments suggests the anticipated increase in U.S. interest rates, if kept to a modest 25 to 50 basis points during 2016, could create pricing imbalances in the equity markets and drive better opportunity for active managers.

Like many other investment providers, New York Life MainStay Investments publishes a yearly outlook to give investors an idea of what the firm is expecting for the next 12 months and beyond.

In this year’s update, MainStay researchers from across the firm’s independent boutique investing teams suggest global growth is likely to hold around 3% next year, providing opportunities for active management “in an environment where broad equity returns in the low- to mid-single digits appear likely.”

The skills of an active manager may be very beneficial next year, MainStay predicts, as identifying fast-moving opportunities and being selective about risks will be key drivers of success in 2016. “Areas to monitor include energy and other commodity prices, central bank actions, and China’s efforts to reform/transition its economy,” the outlook report explains.

Pulling insights from the MainStay global equity team, the report argues Europe’s recovery continues to be spotty, “despite helpful downward moves in the euro and oil prices,” while China’s attempt to transition its economy “is experiencing challenges that raise concerns that bear watching.”

Thinking tactically, MainStay says this challenging macroeconomic backdrop and the unwinding of very easy U.S. monetary policy gives companies with strong returns and durable cash flows an even greater advantage.

NEXT: Comparing global markets 

Comparing different markets around the world, MainStay finds the U.S. equity market outlook appears relatively favorable, and “a scenario of 2% to 3% U.S. economic growth with interest-rate increases should favor equities over fixed income.”

“We expect stabilization or improvement in energy investment, capital goods orders, housing/home improvement, and consumer spending,” MainStay says. “We are also looking for signs of improvement outside the U.S. A widely held view at MainStay Investments and our independent boutiques is that a modest pickup in economic growth represents a reasonable base case scenario for 2016, with little threat of inflation or deflation being a clear and present danger.”

Another positive prediction is that commodity prices, which MainStay cites for much of the weakness in headline inflation in 2015, should exert less influence in 2016. “Crude oil prices are expected to be volatile and range-bound between $40 and $60 per barrel until late 2016,” the report explains. “At that time, we expect the modest decline in U.S. production to enable global demand to catch up with supply, potentially stabilizing energy markets.”

Beyond cyclical trends, MainStay suggests “demographics, debt burdens, and low productivity” have also contributed to lower global growth since the financial crisis.

“Companies that generate cash, but have fewer growth opportunities in which to invest profitably, will engage in acquisitions or return more cash to shareholders,” MainStay predicts. “A shareholder yield strategy composed of dividends, stock buybacks, and debt reduction can provide attractive returns in this environment.”