Commodities hit the skids and bonds have fallen – where to next in 2016?
The State of the Global Financial Markets Heading into 2016
2015 has been a year of mixed blessings for traders and investors. On the currency trading front, anyone going long on the USD was pleasantly surprised, time and again. Greenback strength has dominated the markets, and will likely continue to dominate over the euro, emerging market currencies, and maintain a strong standing in the US dollar index. Currently, the USD is hovering around the 99.5 mark on the US dollar index, just shy of the 52-week high. We have seen incredible weakness emanating from the $5 trillion equities rout spurred by the Chinese meltdown. China is the world's second-largest economy, and downward revisions in the performance of this economy have had a dire effect on emerging market countries. For starters, China is the #1 market for all exports of energy and mining stocks from countries like the Democratic Republic of Congo, South Africa, Zambia, Nigeria, Venezuela and scores of others. We have seen sharp declines in exports of iron ore, copper, manganese, platinum, gold, silver, cobalt, aluminium and other mining and energy commodities. There are several reasons why we are witnessing such pervasive weakness in commodities. These include the following:
Chinese production and demand for steel has tapered off dramatically in 2015 and will continue to decrease in 2016. As a result, iron ore demand will slow significantly in 2016. Therefore put options on iron ore and steel are a safe bet for investors and traders.
Major mining companies like Anglo American (AAL:London), BHP Billiton (BHP), Rio Tinto (RIO), Glencore PLC (GLEN:London) and others have taken huge hits in 2015. If these companies are to recover in 2016 it is going to take monumental effort, restructuring, cost containment, divestiture and possibly even the cessation of less profitable business units within these companies. Already we have seen mining giants like Glencore PLC shuttering copper mining operations in South Africa, the DRC and Zambia. Similar measures by competing companies are likely to follow. Long-term profitability for companies like this is a possibility, but not in 2016.
The Fed has been pushing for interest-rate hikes for most of 2015, as the US economy is showing strong signs of improvement. Not only have we seen non-farm payroll figures increasing, the unemployment rate decreasing, the rate of inflation steadily increasing and general consumer sentiment on the up and up – but the Fed has also been hinting at a 0.25% hike in interest rates come December 15/16 when the FOMC meets. This will have a significant effect on the USD, equities and emerging market currencies. When the Fed hikes interest rates, equities demand will decline, emerging market currencies will depreciate and the USD will strengthen over the short to medium-term.
- We can expect strong Q4 retail sales figures to come in for major technology companies like Amazon, Apple, Google, Facebook and the like. Amazon has been the best performer of the year to date in the tech sector. In fact, the value of Amazon has now surpassed that of Walmart. If you're looking for a stock that is going to rock in 2016 you cannot go wrong with Amazon. Its meteoric rise has been nothing short of phenomenal in 2015. Barring a dramatic global collapse, there is little to suggest that Amazon will head south anytime soon.
There have been several surprises during the course of 2015, notably the bond markets. Most analysts were of the opinion that bonds would rise in the year, but they fell. This is largely due to the fact that the Fed has been reluctant to hike interest rates. Mention has already been made of the commodities rout, and some commodities have fallen to 13-year low prices. Copper and iron ore are among two of the heaviest hit commodities, not to mention crude oil which is now trading between $40 and $45 per barrel after having plummeted from over $120 per barrel a year ago.
My Expectations for 2016 are as Follows:
Energy stocks have plenty of value at this point, provided they don't bottom out too much further. There is lots to be gained from investing in energy stocks given that the EIA is expecting the oil price to rise to $55-$65 within the next year.
The S&P 500 energy index is worth investing in, given that it has plummeted 20.7% since November 2014. There is lots of value in this index.
Natural gas is a definite safe haven investment since many companies and consumers are switching from fuel to natural gas for heating, air conditioning and the like.
It is possible to purchase junk bonds as they are trading at lower levels. Again, value can be had in this sector.
- You may wish to steer clear of biotech stocks, since they are overvalued at this point in time. The index shares plunged 21% in five months, but in the past 5 years it has grown 300%. I would certainly wait before getting involved in this overvalued sector.
Brett Chatz contributes from his vast expertise for the globally renowned spread betting company–InterTrader. He is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects.
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