An old joke about economists says making forecasts is like trying to drive a car looking only in the rearview mirror. But with the benefit of hindsight, here is a look at Pacific Money’s 2015 forecasts and what might be expected in the upcoming Year of the Monkey.
Interest Rates
Pacific Money’s January 7, 2015 article tipped a possible interest rate hike by the U.S. Federal Reserve as early as June, based on the fastest U.S. economic growth rate in 11 years. Meanwhile, the European Central Bank (ECB), China and Japan were all forecast to move in the opposite direction, with Australia’s central bank expected to leave policy unchanged.
However, the Fed kept markets and governments in suspense until nearly year-end, finally announcing on December 16 it would hike its target rate to between 0.25 and 0.5 percent, as part of an expected series of “gradual increases” in the federal funds rate. The world’s other major economies acted as predicted though in further easing monetary policy, reflecting a growing divergence between the world’s biggest economy and the rest.
2016 prediction: The Fed continues its gradual hikes, up to around 1.25 percent by year-end, as the U.S. economic recovery continues to gain momentum. However, the ECB and China ease policy further to prop up growth along with central banks in Indonesia and Taiwan, while Australia and Japan stay on hold, barring a major growth shock from China or elsewhere.
Bonds
After delivering in 2014 their best return in more than a decade, averaging 7.6 percent, bonds were not expected to repeat the performance this year due to predicted stronger global growth.
However, China’s slowdown and a “flight to safety” have bonds on track to outperform stocks for a second straight year in 2015. According to Bloomberg News, Bank of America Merrill Lynch’s Global Broad Market Index of bonds has gained 1.3 percent this year, compared to a 2.9 percent decline in the MSCI All Country World Index of shares.
Bonds have not outperformed stocks for two straight years since 2001 and 2002, when the burst of the dot-com bubble hit equities. The past year has also seen the collapse of “junk bond” funds that has been compared to the global financial crisis, along with a rally in European government bonds that has driven 40 percent of eurozone yields below zero.
2016 prediction: Lackluster inflationary expectations, falling oil prices and worries over emerging economies will prevent a surge in U.S. long-term bond yields, while expansionary monetary policy elsewhere will also keep yields low. Improved global growth and higher corporate earnings should also see stocks recover from the Fed’s tightening to ensure a better year for equities in 2016.
Resources
China’s slowdown and oversupply in bulk commodities has helped to ensure another weak year for resource prices in 2015, hitting the region’s commodity exporters such as Australia and Indonesia but benefiting major importers including China, Japan and India. The Bloomberg Commodity Index has slumped by 26 percent, potentially its worst year since 2008.
As noted by commodity researcher CRU, this year’s hottest commodities have been sulphuric acid, potash and phosphate rock, with the coldest including coal, iron ore and nickel. Overall though, it has been a year of savage losses in market value, job cuts and mine closures as the industry painfully adjusts to the “new normal” of a maturing Chinese economy, the world’s biggest consumer of resources.
2016 prediction: Improved global growth and reduced minerals supply will gradually restore industry confidence, with base and precious metals tipped to lead the recovery. CRU expects cobalt, sulphuric acid, thermal coal, tin and zinc to be among the winners with predicted price gains of more than 15 percent through to 2019. Elsewhere though, further pain may be in store until supply-demand imbalances are eventually corrected.
Deflation
Japan’s war against deflation continued in 2015, with the Bank of Japan (BOJ) forced to postpone its 2 percent inflation target due to weaker oil prices, even while Tokyo declared it was winning the battle to change consumer mindsets.
The deflation disease may have even spread to China, with ANZ Research declaring on December 9 that the world’s second-biggest economy has entered a “deflationary era” on the back of weak consumer and producer prices. China’s GDP deflator, a broad measure of price changes, contracted by 0.7 percent in the third quarter, while producer prices have dropped by 5.1 percent over the first 11 months of 2015 and consumer prices averaged just 1.4 percent.
2016 prediction: The BOJ will not achieve its 2 percent target, but Japan will gradually overcome deflation thanks to continued cheap money, higher import prices and an economic pickup. Early indications of progress are evidenced by “core-core” inflation data and a rise in the number of fixed versus variable-rate mortgages. Meanwhile, China’s monetary authorities will further ease policy as they attempt to stave off the “Japan disease” with some quick medicine.
Currencies
The U.S. currency has gained nearly 9 percent this year as traders anticipated the Fed’s eventual move to hike interest rates, while commodity currencies such as the Australian dollar and emerging markets such as Indonesia and Malaysia have felt the effects of the resources slowdown.
China shocked markets with its yuan devaluation in August but still remains the strongest currency among 24 emerging market currencies in trade-weighted terms, according to the Bank for International Settlements. The Japanese yen has also declined slightly in 2015, aiding exporters’ profits and Tokyo stocks, helped by the BOJ’s easy money policy.
2016 prediction: Further rate hikes by the Fed will ensure another “year of the dollar,” as other nations attempt to keep their currencies cheap to stimulate exports. All 10 major Asian currencies are expected to decline in 2016, led by the Indonesian rupiah, South Korean won and Singaporean dollar, as central banks cut rates further and capital outflows accelerate.
With China expected by the International Monetary Fund to slow to 6.3 percent GDP growth in 2016 and developing Asia to 6.4 percent, India will remain the standout while Japan attempts to pick up speed ahead of the 2017 consumption tax hike.
For Asian investors, profiting in the Year of the Monkey could prove tougher than ever, with plenty of potholes expected on the road to global recovery.