Facing moderate global growth, lower returns and higher volatility, investors this year will cast widely for the best opportunities.<\/strong><\/p>\n THE COMING YEAR WILL BE a turning point in market history as the Federal Reserve begins normalizing U.S. interest rates after seven years of unprecedented accommodation. The beginning of higher U.S. interest rates will occur in a global economy experiencing historically large central bank policy divergences among major countries, which should bring about greater volatility. High sovereign debt burdens and sluggish economic growth will also dominate many policymakers’ agendas.<\/p>\n Rather than following the Fed’s path to higher rates in 2016, we expect to see the European Central Bank (ECB) and Bank of Japan (BoJ) provide additional monetary stimulus. Meanwhile, Chinese authorities will likely cut rates and pursue additional fiscal measures to maintain lower, but potentially steadier, economic growth. A stronger U.S. dollar might complicate the Fed’s approach by weighing on growth and corporate earnings.<\/p>\n Against this backdrop, we see global growth as a mixed bag. Developed markets, led by the U.S., are likely to grow at reasonable rates in 2016. However, the picture is less clear in emerging markets, where a buildup in corporate debt and lower commodity prices pose risks. Tensions in the Middle East and Europe are among the geopolitical concerns that may potentially affect capital markets. Nonetheless, consumers around the world are in relatively better shape than the manufacturing sector, and growth in consumer spending suggests a low risk of a recession in 2016, especially in developed economies.<\/p>\n Equities over bonds and commodities<\/p>\n We continue to favor equities over bonds and commodities for 2016 but expect lower returns and higher volatility than in the past five years. While we prefer developed over emerging markets, we think higher starting valuations and gradually rising interest rates in the U.S. could weigh on returns from equities and bonds. Within bonds, it’ll pay to be discerning in the credit space and a good active manager with a history of prudent risk management and superior security selection will matter.<\/p>\n Over the next three to five years, we expect investors to find value in areas of overinvestment such as energy, industrials and emerging markets.<\/p>\n Equity outlook\u2014positive but muted returns<\/p>\n We remain positive on U.S. equities in 2016 based on improving global growth and corporate earnings, a slow Fed hiking cycle, and corporate profit margins that should remain historically high. Rising volatility should favor higher quality companies with strong balance sheets and growing cash flows and dividends. Our preferred sectors are information technology and health care. In our view, health care offers growth opportunities over the long term as demand continues to rise with an aging global population. In information technology, cash on balance sheets remains high and earnings growth is expected to be stable.<\/p>\n Outside the U.S., we see the need to hedge currency exposure while investing in Europe and Japan, our preferred equity markets. Our positive view on Europe is supported by recovering domestic demand, attractive valuations relative to those in the U.S. and scope for additional policy stimulus. In Japan, our expectation is for highly stimulative monetary and fiscal policies. Japan also has the strongest earnings revisions as corporate profit margins improve and there are clearer signs of federal and corporate reform. Meanwhile, a stronger dollar and weakening Chinese growth will challenge emerging markets.<\/p>\n Fixed income outlook\u2014more variability and selectivity<\/p>\n We view bonds as essential for diversification and income purposes, with high-quality issues comprising the core of a fixed income portfolio. Our preferred sectors remain high-quality municipals and U.S. investment-grade bonds, where we expect spreads to tighten. The outlook for high yield is challenging given its higher exposure to commodity-related sectors. Also, in the view of our Bank of America Merrill Lynch (BofAML) Global Research high-yield team, having the Fed tighten policy in the context of lower liquidity is likely to drive spreads wider. We remain positive on municipal bonds because steady economic growth has produced ample tax revenues, allowing states and municipalities to balance their budgets.<\/p>\n A “low and slow” pace to higher rates in 2016 should not pose outsize risks to diversified bond portfolios. We think the current level of bond spreads will resist gradually rising rates. As investors continue to look for more income, we expect demand for bonds to remain high, keeping yields from running up too much and thus prices from falling too far. Last year’s low-yield, low-inflation environment sets the stage for investors to diversify their sources of portfolio income beyond fixed income coupons and stock dividends.<\/p>\n Alternative investments<\/p>\n A firm U.S. dollar and subdued global growth will continue to put downward pressure on commodity prices. Oversupply in the energy markets is also likely to persist in 2016; however, our BofAML Global Research commodities team expects demand to improve slightly. Given our expectations of greater volatility and market uncertainty, we continue to support alternative investments that provide portfolio diversification, such as global macro and managed futures strategies. For qualified investors, there should be opportunities to capture illiquidity premiums\u2014which serve to compensate investors for not having immediate access to their money\u2014found in private equity funds focused on lending or real estate.<\/p>\n Conclusion<\/p>\n Global growth should inch higher in 2016, driven by developed markets, but inflation\u2014though rising slightly\u2014should remain muted and allow interest rates to remain lower for longer. In addition, central bank policy divergence should bring about greater volatility and a firmer U.S. dollar. We expect equities to outperform bonds, but acknowledge that returns going forward are likely to be lower than in the past five years.<\/p>\n A world of higher investment volatility and lower average returns will place a premium on managing after-tax returns, and we think investors should remain diversified, adopt periodic rebalancing and continue to review portfolios for the appropriate balance between tax-efficient investing, risk management, and active and passive solutions.<\/p>\n Active and Passive Investments<\/p>\n Both active and passive approaches to investing\u2014in other words, whether an investment portfolio is managed by skilled professionals or it tracks an index\u2014have passionate advocates, leading to intense debates over which is the superior method. This contributes to an insular view of the overall portfolio construction process. We believe there are many aspects to consider in the “active vs. passive” discussion.<\/p>\n The debate is too narrow within the context of goals-based wealth management, focusing the investment discussion on beating a benchmark rather than on achieving individual goals. Alternative Investments, such as hedge funds and private equity, can result in higher return potential but also higher loss potential. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity and your tolerance for risk. Some or all alternative investment programs may not be suitable for certain investors.<\/p>\n The investments discussed have varying degrees of risk. Some of the risks involved with equities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Bonds are subject to interest rate, inflation and credit risks. Investments in high-yield bonds may be subject to greater market fluctuations and risk of loss of income and principal than securities in higher-rated categories. Historically, municipal bonds have been high-quality investments relative to other fixed income securities. However, not all municipal bonds are high grade, and when deciding whether to invest in municipal bonds, you should consider default risk, market risk and liquidity risk. Income is generally exempt from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-exempt, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal alternative minimum tax (AMT). Investments focused in a certain industry or sector may pose additional risks due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks and other sector concentration risks.<\/p>\n","protected":false},"excerpt":{"rendered":" Outlook 2016: A turning point for the markets Facing moderate global growth, lower returns and higher volatility, investors this year will cast widely for the best opportunities. THE COMING YEAR WILL BE a turning point in market history as the Federal Reserve begins normalizing U.S. interest rates after seven years of unprecedented accommodation. The beginning …<\/p>\n","protected":false},"author":3,"featured_media":46671,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[36],"tags":[],"class_list":["post-46667","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-te-public"],"yoast_head":"\n
\nCertain asset classes and market environments may favor active management. For example, small-cap and emerging market equities as well as municipal and high-yield bonds can benefit from active managers who may add value through research and risk management.
\nFor most portfolios, some combination of active and passive strategies makes sense when one considers the complexity of pursuing investors’ objectives.
\nHybrid strategies, often known as smart beta, have grown more popular in the past five years and provide investors with additional tools to align portfolio exposures with specific needs that might not neatly fit a benchmark.
\nThe bottom line: In our view, it’s not a debate about whether active or passive investment is better. Instead, this discussion should focus on how various strategies can complement one another to help pursue an investor’s goals with an appropriate level of risk.<\/p>\n