Macro Outlook – 2016

Date: November 19, 2015

As we approach the end of 2015, it’s time to start looking at what 2016 may bring. Below are some
of my expectations and, as such, are subject to change and should in no way be considered an
investment recommendation. They are only documented to give food for thought and perhaps a
different perspective on things. This piece kicks off with my Macro expectations, which will be
followed by a piece on the Financial markets. A reversal of Fed policy and a significant increase in
fiscal spend are the two key risks to my view, but these are only likely to materialise with lower
markets and most probably towards the end of ‘16.


Macro by country:

Most economists are relatively bullish on the US economy and expect it to be the driver of
global economic growth. While, with zero rate policies and ample credit available, there is little to
indicate any severe slowdown in the works, I don’t expect that the underlying economy will be as
strong as many economists believe. Indeed, unless there is an increase in fiscal spending and a
weaker USD, I would not expect growth to exceed c.2.5%.

Headwinds to growth:

Tailwinds to growth are waning:

The market’s performance also gives some support to this view of weak growth, with cyclicals
(energy and mining) significantly underperforming defensive areas of the market – hardly reflective
of a market expecting stronger growth. Sales data from the cyclical sectors is also weak.

The key risk to my view is that the government may significantly increase its fiscal spending to
support growth. This policy would be stimulative short term but a rising debt/GDP will impact the
ability to run deficits further out (it’s simply a case of borrowing from the future).

In terms of inflation and rates, while the Fed may tighten, I would expect them to be very slow to
initially raise rates and any rate hike cycle to be relatively short. While there is some wage growth
there is little inflation pressure at this point and the money multiplier continues to trend south
(although recently this indicator has indeed started to show signs of improvement). This is not to
say, however, that they shouldn’t have raised rates a few years back as cheap credit has a habit of
driving up mal-investment, the results of which we will likely see over the course of the next few

US inflation is thus expected to remain very benign into 2016 and deflationary forces from a
stronger USD and lower commodity prices are likely to remain in play, through the early part of the
year. Should wage pressures indeed flare up, the participation rate is likely to increase, offsetting
some of this pressure.

While European manufacturing will get some boost from the weaker Euro and from lower wage
costs in parts of the periphery, underlying economic health continues to look weak. Saying that, it is
showing gradual improvement, though again I expect reality to fall south of consensus.

Tailwinds to growth:

Headwinds to growth:

It’s been 7 years since GFC and Europe still has a long way to go to recover. While the ‘debt crisis
has been continually pushed out, yields have risen across parts of the periphery and we are seeing
political change that could potentially destabilise the status quo (see Portugal).

In terms of inflation, it will remain very benign and there is little pressure for the ECB to alter policy
at this point. Expectations are for the Euro to weaken further against the USD.


With the BoJ still adamant over its benefits and with the economy back in recession, due in part to
weaker demand from China and emerging markets, we are likely to see more QE in Japan. High
debt levels and weak demographics aside, QE has driven inflation expectations up and the
deflationary factors such as falling property prices and corporate deleveraging have reversed, at
least for the moment.

Tailwinds to growth:

Headwinds to growth:

While we may see continued economic improvement in 2016, of all the developed nations, Japan
is one that could potentially enter a ‘weimar’ like hyper inflationary blow up – driven by ever more
QE. The government is already a significant holder of debt and equity assets and will likely have to
continue doing more. Now that they are on the QE path it will be very difficult for them to exit.

Emerging markets:

Many emerging economies are going through a very rough patch, with the USD and commodity
demand being perhaps the two key factors to watch here.

Countries such as Turkey, South Africa, Malaysia and a number of others, have significant
exposure to USD denominated debt, which has impacted their ratings and ability to raise debt.
Also, a weaker China and lower oil and other commodity prices have also significantly impacted
the commodity exporters, most notable perhaps Brazil.

We have already seen a number of economies and currencies come under pressure. The
Malaysian ringgit and South African rand have both fallen c.25% to the USD YTD. It’s even worse
in the case of Brazil. Unlike prior EM crises, most have allowed their FX to float but this inevitably
hurts those with USD debt exposure. Tightening potentially hurts even more.

Headwinds to growth:

Potential Tailwinds:

Of the major emerging markets, China looks to be the most resilient. Net consumer leverage and
mortgage borrowing remains relatively low as is external debt (c.15% compared to Turkey at over

The linchpin of the views expressed above are that the USD will strengthen in 2016. With an
over-leveraged world and much of this debt being USD denominated, it’s a significant call –
one which offers up many opportunities from which to profit should one be prepared


Contributed by Rob Aspin, CFA

Rob is an investment professional and CFA Charterholder with extensive experience in discretionary portfolio management, portfolio construction, hedge funds, global stock selection and investment advisory. His views can be followed on