Macro Highlights & Strategy January 4th 2016

Market analysis - 04/01/2016

Stockmarkets have kicked off the new year with steep declines. / Our macroeconomic scenario sees 2016 as a transition year. / The US has entered a new era of monetary tightening. / Growth is back to stay in the Euro Zone. / After five years of capital flight, the emerging markets are starting to look fairly valued.

THE BEST THING TO HAVE IN 2016 WILL BE GOOD HEALTH

After ending 2015 without any fanfare, stockmarkets around the world are off to an inauspicious start in 2016. Today (4 Jan.) trading was suspended in Shanghai and Shenzhen after the local benchmarks respectively plunged 6.9% and 8.2% (see chart below). Earlier attempts to steady prices with brief interruptions had failed. At 13.34 local time, officials called a halt to trading for the day to prevent another rout like the one last summer.

2016, A HIGH-RISK TRANSITION YEAR FOR THE GLOBAL ÉCONOMY

This first issue of the year for Macro Highlights & Strategy is given over to the main economic themes that will shape 2016. For 15 years our scenario has reflected the top-down view taken by the Private Banking division’s economists. Our aim is to be as clear and accurate as possible, although this is only part of our analysis. And it must not be viewed as a set of investment recommendations.

A NEW ERA BEGINS

The US economy will continue to grow at about the same rate in 2016 as it did last year. Our models point to a pace of 2.4%, somewhat above the 2% trend line. However, the momentum underlying this rosy outlook is not as firm as it seems.

GROWTH IS BACK ON TRACK AT LAST

Growth in the Euro Zone has settled back in positive territory. Our econometric models forecast 2% expansion in the region’s Gross Domestic Product (GDP) during the first six months of 2016. The rate could subsequently fall back somewhat, but there is no cause for alarm. Growth simply cannot stay sustainably above its 1.2% trend line.

CHINA IS THE MAIN SOURCE OF GROWTH… AND RISK

Not once in 2015 did the emerging countries seem capable of shaking off their five-year-old funk. Adding to the slump in most commodities, China’s stockmarket was hit by a steep sell-off and the yuan depreciated unexpectedly. Political uncertainty in Turkey, Russia and Brazil did not help matters. To cap it all, the US Federal Reserve’s long hesitation before finally raising interest rates undermined all the emerging currencies.