A low growth, low rate, low inflation environment is expected over the next five years, according to Manulife Asset Management’s “Global Intelligence: The Year Ahead” report that looks at the key drivers of the global economy and consequences for investors in 2016.
“The main drivers in the global economy in 2015 will continue to shape the macroeconomic environment in 2016 and beyond,” states Megan E. Greene, chief economist at Manulife. “These drivers are all characterized by the ideas that we live in an age of oversupply and that central bankers are the only policymakers currently poised to provide enough stimulus to significantly try to generate demand.”
The report looks at a range of investment areas and asset classes, including fixed income, equities, commodities and asset allocation.
Other insights include:
- An oversupply of debtis constraining most governments’ abilities to provide a fiscal stimulus to generate demand. Central banks have stepped in to fill the void with significant monetary easing. As a result there is an oversupply of liquidity in the macroeconomic system.
- The United States will lead the global economy in 2016,supported primarily by consumer demand. As households continue to deleverage and repair their balance sheets, lower oil prices will eventually start to feed into better retail sales data towards the end of the year.
- One other bright light in the global recovery among developed countries is the UK. Manulife expects growth in the UK to average around 2.3 percent over our five-year forecast period. One potential risk to UK growth is a likely referendum on EU membership in 2016.
- Japan is unlikely to provide much spur to global growth in 2016, or the subsequent five years. In our view, Manulife continues to see further fiscal and monetary stimulus in Japan, but in the absence of structural reforms, it expects growth and inflation of around one percent over the next five years.
- The greatest risk to the global economic recovery is in China, which is currently trying to rebalance its economic growth model away from investments towards consumption. But that process may take longer than expected.
An asset allocation point of view, summarized by Bob Boyda, co-head of Asset Allocation:
- Our base case for the US sees the economy continuing to plod along with no material risk of recessionover the next five years; a scenario that is good for risk assets.
- Very low inflation numbers make these modest nominal returns quite respectable by historical standards. Inflation is not a risk.
- The character of a market repeats. The character of our current asset markets can best be described as a series of long, slow climbs in price followed by breathtaking downward smashes. Investors should get used to this and expect 2016 to bring more of the same.
- There is a mild optimism about the state of the global economy and therefore about risk assets like global equity, real estate and credit markets.