Economic Outlook December 2015

We expect decent return, but higher volatility for 2016.

2015 turned out to be a difficult year for investors. 2015s last week of trading pushed the S & P 500 into negative territory of -0.73 per cent for the year. Europe fared better and the Bloomberg European 500 managed to raise 5.80 per cent in 2015. Japan’s Nikkei 225 rose even more and climbed 9.10 per cent. Despite the steep oil price decline of almost 35 per cent, Oslo Stock Exchange’s OSEBX climbed almost 6 per cent last year. All numbers are in local currency. Norwegian investors with unhedged US exposure can look back on a year where the currency carried most of the return as the US dollar rose 18.7 per cent against Norwegian kroner. The EUR/USD started 2015 at 1.21 and ended at 1.086, a depreciation of more than 10 per cent for the common currency.

Among the key events in 2015, the first rate hike in more than nine years by the Federal Reserve, deceleration in Chinese economic growth, continued fall in commodity prices, and several signs of a broader growth pick up in  Europe, stands out as the most prominent ones.

Emerging markets were those that got the most severe head winds. It was led by the US dollar appreciation, and fall in commodity prices. Russia and Brazil entered severe recessions. Both economies are heavily commodity oriented. In addition, Russia faced international economic sanctions, while Brazil was haunted by a number of corruption scandals around the partly state owned oil company, Petrobras.  

As we move into 2016, investors will follow global growth prospects particularly close. The global PMI for the service sector has remained robust, while the one for manufacturing has slowed down. The strong US dollar is hitting US exporters hard, while European ones are enjoying a relatively cheaper euro. In Europe it is particularly good news that growth is boarding out, and momentum is picking up in France, Italy, Spain and even Greece. One important piece of the global growth puzzle still missing is companies’ investment willingness. For the last few years investors have received solid return due to falling interest rates and multiple expansions. 2016 is the year we believe investors will demand top line growth. Furthermore, we are of the opinion equities will give the best return 12 months forward. We also acknowledge that bond spreads are back on several years high, and has the potential to deliver decent return for the coming year. Still, we encourage investors to diversify their portfolios as we see higher volatility going forward than we have been accustomed to for the last few years. 


By Hans Kristian Hals, Head of Investment Strategy