Ahead of the start of the New Year, analysts have issued their forecasts for market performance over the next 12 months. Virtually all agree that equities have a greater revaluation potential than fixed income and prefer the European markets over the US bourse. In Europe, the financial sector, one of the most heavily penalized in 2015, stands out as one of the clearest contenders in 2016.
The Economy: Key variables
In 2016, attention will remain centered on many of the key factors that have shaped market performance throughout 2015: the differences between the monetary policy deployed by the FED (the first interest rate hike since 2006 was made in late 2015, and more are expected in 2016) and the ECB (marked by the continuity of its expansive policy), commodities prices, specifically crude prices, the economic cycle in China, and the impact of all of these on emerging economies…
The worsening of regional conflicts and geopolitical tensions is also a concern, as this could impact the markets and trigger volatility. And, in Spain, the elimination of political uncertainty following the elections in December will be a key factor for the markets.
In any case, against the current backdrop of high valuations and pressure on corporate earnings, it is essential for economic growth to drive revenues, leading the markets to rise.
Europe vs USA: Markets with the greatest potential
There is a general consensus among most brokers over which assets are likely perform best in 2016. Almost all see little upside potential in fixed income, both sovereign and private, and are recommending equities.
Additionally, the difference in interest rate policy between the United States and Europe will be a key factor shaping the performance of both markets. The rise in the price of money in the United States will strengthen the dollar, which is likely to negatively affect US corporate earnings.
In the European market, however, the dominant tone will still be liquidity injections and the ECB’s debt buyback policy, that could even be stepped up if inflation remains low. Experts also consider than internal demand should become more buoyant on the back of higher domestic lending.
Lastly, the European business cycle is recovering slowly and this recovery could gain momentum as governments start to ease their austerity policies.
In sum, based on the above, and taking onboard the high US equity valuations, especially in comparison with Europe (where equities are trading at much more attractive levels), almost all analysts are showing a clear preference for Europe vs the US.
European markets: Preference for the Financial sector
Most analysts consider that the European banking sector in general (and the Spanish banking sector in particular) will be a potential winner in 2016. The outlook also appears to be positive for the energy sector (boosted by an eventual recovery in crude prices), the industrial sector and telecoms.
Within the banking sector, most analysts prefer names that are benefiting most from the measures adopted by the ECB, players in potential consolidation processes involving Spanish banks, restructuring stories and banks paying higher than average dividends. They also overweight banks have been heavily penalized in 2015 and are therefore undervalued, especially when compared to other sectors.