Investment Themes in 2016
New Normal or No Normal
We are pleased to present our investment themes for 2016, and we wish all readers of our Citi GPS series successful investing in the year ahead. A tradition at the beginning of each year is to make a New Year’s resolution — a vow to change something for the coming year in an act of self-improvement — be it eat less, exercise more, worry less, or save more. Inevitably, these resolutions either get forgotten or fail within the first 30 days, but the purpose is to try and take control of one portion of your world and essentially bring things back to normal.
Since the Great Financial Crisis, central banks have been making resolutions at least once a year in the hopes of effecting change that will positively drive economic growth back to ‘normal’ levels. Interest rates have been lowered, inflation targets have been set, and fiscal belts have been tightened, yet global economic growth has remained stubbornly sluggish at below ‘normal’ levels.
What if the problem is that there’s just too much to change? Perhaps we have just hit a new normal or maybe the concept of normal just does not exist anymore. In general, most advanced economies are maintaining extraordinarily loose monetary policy, but some are now even allowing negative nominal policy interest rates, a tool that had been used very rarely in the past but is now being embraced by four European countries. The U.S. Fed is bucking the easing trend and is starting to creep interest rates forward, but at a rate that is far different from any other hiking cycle. Emerging markets are facing conditions where all three main sources of GDP growth — exports, public and private domestic spending — are constrained, and China could either be a positive investment shock for EMs or the single-largest risk to global growth. Commodity markets remain volatile as investors grapple with conflicting signals of whether and how rapidly supply/demand fundamentals are shifting to normal balance.
Sluggish economic growth has led to the emergence of new socio-economic risks, including a lack of trust in elites, growing income inequality, and widespread youth unemployment. The convergence of these new risks with older geopolitical risks could lead to an increase in events like mass protests and government collapse becoming systemic instead of episodically disruptive, thereby undermining globalization. Migration, either due to civil wars and failed states or people moving for economic and social reasons, is on the rise or could be destabilizing, particularly in Europe. Although the economic drivers of migration — rising prosperity in low-income countries plus large income disparities between countries — will remain intact, we doubt that migration is likely to provide the cure for the low potential growth rates and sluggish actual growth rates seen in many advanced economies.
But not all change is worrisome. In this report, we also look at some areas where we see change as a positive, particularly through technology. We believe, for example, that the development of virtual and augmented reality will create a major new market that could replace the smartphone market and develop into an overall $600 billion opportunity by 2025 while the increase in adoption of electric vehicles and technology advances in grid-scale battery storage are both positives for lithium-ion batteries. We see big data increasingly becoming a tool in investment management, which could enhance quantitative fundamental models such that the line is blurred between quantitative and discretionary fundamental trading. Finally, we look at the importance of blockchain and its potential for being a disruptor in the banking industry.