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Investors should think differently about their strategies in 2016, says SSGA

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State Street Global Advisors (SSGA) says investors need to think differently in 2016 and consider re-engineering their core exposures, implement strategies to weather volatile markets and be prepared to look harder than ever for growth.

“The US economy is in decent health, bouncing back from a slow start in 2015, but disappointing growth results in emerging economies lead us to forecast low and slow global growth for 2016,” says Rick Lacaille (pictured), executive vice president and global chief investment officer at SSGA. “Slowing China, structural challenges and continued geopolitical instability will mean volatility continues. Investors will need to weigh their opportunities against their risk tolerance, keeping an eye on the long-term. Europe and Japan are recovering from significant economic declines and should continue to benefit from positive government policy.”
 
“We believe that volatility is here to stay for a while driven by geopolitical and structural factors. However the balance for investors is the need to maintain some level of exposure to growth assets,” said Dan Farley, chief investment officer for SSGA’s Investment Solutions Group. “We have seen a big trend in investors wanting strategies that manage the downside but allow them to participate in the upside.”
 
SSGA believes that investors should weigh the opportunities against the risk and their own level of risk aversion, but we would advocate taking a longer view. The current environment is lending itself to low beta strategies, targeting the right asset class mix and liquid alternative options.
 
“The low and slow environment is forcing investors to challenge the whole asset management framework,” says Ric Thomas, global head of research at SSGA’s Investment Solutions Group. “Targeting those factors that you believe in can bring rewards and also help improve your active management allocations.”
 
According to SSGA, investors face the challenge of hitting their return objectives, despite diminished return expectations on major asset classes. Ensuring portfolios accurately target intended exposures by integrating smart beta factors such as value, quality and size can help sharpen investment outcomes.
 
“A feature for much of the past two years has been the rise in uncertainty around China, volatile commodity prices and low central bank interest rates,” says Bill Street, head of investments, SSGA Europe. “This has resulted in a somewhat disjointed rally in riskier assets that has lifted markets far above the levels of 2009; however, we believe that there are still opportunities at current valuations for both investment grade and high yield debt to reward investors.”
 
In the current environment of continued quantitative easing, SSGA says selective exposure to credit offers good upside potential for investors.
 
The firm also believes that credit fundamentals are broadly healthy – strong US and improving European corporate earnings plus a preference for equity-funded M&A has spurred high cash balances and prodded issuers to retire debt. This has also reduced refinancing risks in the face of an expected rate increase over the coming years.
 
“Led by Brazil and Russia, growth in emerging markets is expected to accelerate from 3.6 percent in 2015 to 4.2 percent in 2016,” says George Hoguet, global investment strategist for SSGA's Investment Solutions Group. “However, risks are to the downside, reflecting uncertain economic and financial conditions in China, potential negative spillovers from a gradual rise in US interest rates, and slowing world trade.”
 
SSGA’s advice is that investors need to be patient with struggling emerging markets and allow time for growth rates to reach what they were in the past. Return on equity in emerging markets is now lower than developed markets for the first time in 13 years and offer the lowest discounts in the last 10 years. Any rally will likely be guided by changes in key market factors including stabilisation in China and commodity prices, favourable foreign exchange rates, improved local debt dynamics and an increasing pace of structural reform.
 
Despite headwinds (the collapse of oil prices, the strength of the US dollar, and zero inflation), SSGA predicts that US earnings growth should turn positive again in 2016, though not as robust as in earlier stages of this economic expansion.
 
Investors should look to sectors that still have room to grow in this cycle once the Fed begins normaliaing interest rates such as the consumer discretionary sector, housing market and the banking industry.
 
SSGA feels that the European economy is underpinned by several strong market conditions, including quantitative easing, low interest rates, a weaker euro, low material costs and low energy prices. Small Caps are poised to profit from predicted European growth but could be buffeted by increasing volatility. Managed volatility strategies can give investors exposure to growth while protecting portfolios.
 
“For a year that was supposed to be characterised by accelerating growth in the world economy, 2015 was slow to get out of the starting blocks and conditions are unlikely to change much in 2016,” says Christopher Probyn, SSGA’s chief economist. “Investors must plan accordingly to manage their assets effectively in this low and slow environment.”

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