Chris Beauchamp, Head of Market Analysis at IG Group Holdings plc (LON:IGG), and Josh Mahony, Market Analyst, give their outlook for global markets as we head into the second half of 2016 in a very interesting and uncertain post-Brexit market environment. More of IG’s market research can be seen here.
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The UK’s decision to leave the EU has left the UK reeling and without direction economically. Ongoing negotiations will play a huge part in future prosperity, yet perception of the outcome is just as important for investors over the coming years.
Chris Beauchamp, IG Group
Central banks to react to the new norm: the UK now has to adjust to a new norm, with the Bank of England (BoE) policy expected to be accommodative for the coming years. The market is now pricing in an 87% chance of a BoE rate cut by August as a result, with a European Central Bank (ECB) cut looking likely too. Irrespective of wider implications to the UK economy, this shift from monetary tightening to easing warrants further sterling weakness. Given the increase in volatility following the referendum, it is now unlikely the US Federal Reserve (Fed) will hike in 2016.
Aversion to risk will drive diversification: the continued volatility and low yields in traditional assets will provide a boost for alternative assets. Gold is likely to continue its upwards trajectory and we could see another 13% rise by the end of the year, whilst silver will follow suit. After the bubble burst in 2014, alternative currencies are growing in popularity and Bitcoin is the ‘one to watch’ for 2016. It has seen a 55% rise already in 2016, and the shift out of sterling could see Bitcoin hit $900 by December.
Dividends at risk as flight to yield continues: further anticipated easing from developed market central banks and lower yielding bonds is driving a flight to dividend stocks. However the outlook for dividends is volatile. Concerns over the level of dividend cover on balance sheets – particularly in the FTSE 250 – mean dividend cuts are likely.
Large caps set to shine: after years of outperformance by UK midcaps over large caps dating back to the early nineties, FTSE 250 companies now face significant headwinds following the referendum outcome. A continuation of the bear market is to be expected, but large caps are set to shine as investors look for security.
Currencies showing the economic reality: the FX markets are currently the best indicator of the economic reaction to Brexit; showing that Europe is unattractive at this stage. With the Bank of Japan likely to ease policy once more, the big beneficiary will be the US Dollar (USD). The greenback is likely to significantly strengthen further throughout 2016.