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An EM rebound, calmer commodities, and other reasons to be optimistic

I’ve been tasked with presenting the flip side to Geoff ‘Scrooge’ Candy’s warnings yesterday, and I’d suggest it’s not actually that hard to find reasons to be cheerful for markets and the global economy next year.

Normalising Fed policy

The best place to start is in the US, in particular the Fed’s first rate rise last week suggests central bank policy will again be bellwether for the direction of equity and bond markets in 2016. Now that the ‘will they, won’t they’ guessing game is over, surely we can relax into a new rate hike cycle?

Certainly, many see the decision to raise interest rates as a positive sign that may actually lower the risk of a recession in the future by providing flexibility should inflation rise over the next year.

For Derry Pickford, global macro analyst at Ashburton Investments, markets seem to have taken the Fed action in their stride – normalising policy has been interpreted as a vote of confidence in the US economy.

“The consensus among economists is for US GDP growth to be around 2.5% both this year and next, which is much better than the average of 2% over the past five years,” he says.

“Although currently there is no inflation at the moment, if we look at indices that exclude energy, prices are rising at 1.9% year-on-year. As long as oil and commodity prices don’t keep on falling then this will mean that the overall inflation rate will start to increase next year.

“By raising rates now, Janet Yellen is buying insurance against inflation rising to uncomfortable levels.”

Part of the Mark Allen Group.