Can you Find it – Business © 2017 THE FULL STORY…WHAT DOES THIS YEAR HAVE IN STORE FOR THE MARKETS?Published in Can you find it Business Edition on Thursday, January 5th 2016
Foresight: Even with a crystal ball, it’s never going to be 20-20It is that crystal ball time of the year again when investors’ thoughts turn to what 2016 holds in store for the markets.
We all know that hindsight is 20/20 while foresight so often is not. And of course, with markets, it is always news that moves indices. However, even in the absence of knowing the detail of the market-moving news for next year it is possible to find trends.
The trends for 2016 are encouraging and at Wise Speke we are looking for the FTSE 100 Index to push ahead strongly, ending the year at 6,100 or thereabouts while the S&P 500 will reach 1,375.
With the FTSE currently around 5,500 it is a relatively bold prediction, but one that is soundly based on solid grounds of Gross Domestic Product (GDP) growth, inflation forecasts, bond markets and the corporate earnings. The four strands come together to make a powerful argument for 2016.
Economic growth as measured by GDP is likely to be stronger than expected with buoyant corporate profitability feeding through to investment, jobs and consumer spending.
Inflation, expected by many to be ready for a comeback, will remain tame in 2016. While it is true that headline inflation has edged up, it is also the case that core inflation in the major economies has declined over the past year and will continue to fall.
Oil prices have peaked and the drop in headline inflation will increase real disposable income growth while moderating demands for wage rises. Improvements in GDP growth and investment will be accompanied by improvements in productivity.
With inflation tame – if not absolutely tamed – then the pressure for increased interest rates eases. This will feed through into greater stability in bond markets.
The recent strength of the US dollar might be a problem for inflation in the UK, the Eurozone and Japan. However, the link between the dollar and inflation in the other major economies has weakened.
The expectation is that the US Federal Reserve is likely to take interest rates to 4.5 per cent or 4.75 per cent by the first quarter of 2016 and then hold that position. Wall Street has already got the message that the Fed is close to achieving its desired interest rate level and could be ready to climb a good deal higher.
So far so strong. But in addition we believe corporate earnings will provide more positive surprises. Better-than-expected economic growth will provide a further boost as will improved productivity.
However, the ongoing story of globalisation will provide a further push for corporate earnings. Globalisation has been a force for the good in pushing down prices and forcing companies to reassess competitiveness. Firms will continue to cut costs and restructure. They will also be pushed down the road of mergers and acquisitions.
All of that will feed through into positive news flow which, as we said at the start, drives markets.
We may not know the detail yet but the forecast is for stronger economic growth and stable inflation.
Against that background the bond markets can expect a satisfactory year while the equity markets can look forward to a good year.
Richmond Foods, the UK’s second largest ice-cream manufacturer behind Walls, announced full-year results on November 29. Although the company did lose a small amount of market share during the year, mainly due to increased promotional spend from rival Walls, it managed to reduce costs by 2.8 per cent, which contributed to a margin improvement of 0.5 per cent despite the strong competition. Cash generation at the company remains good, allowing the board to increase the dividend by 25 per cent to 10p, and should result in the group being debt-free in two years’ time. Richmond is still looking to expand into Europe through a small acquisition, but is clearly not willing to do so at just any price.