SSGA bullish on European small caps and domestic cyclicals

shutterstock_133158833-smallBy Stephanie Tsui

As volatile 2015 is coming to an end, 2016 is forecast to be another year of volatility, with growth slowing and remaining low, according to State Street Global Advisors (SSGA).

The asset management firm expects Chinese economic growth to grow at a rate of 6% in 2016, lower than the IMF’s prediction of 6.3%, which could have significant negative ramifications for Asia-Pacific economies. “Our caution is prompted by the persistence of many structural challenges in the Chinese economy, including excess manufacturing capacity and persistent deflation,” says Kevin Anderson, Senior Managing Director and Head of Investments, Asia Pacific, SSGA.

Furthermore, it is estimated that emerging markets could overall grow at a rate of 4.3% in 2016, up from an estimated 4.2% growth rate in 2015, thanks to continued slow expansion in the US, easy monetary policies in Europe and Japan, and a positive impact from lower oil prices. However, Anderson cautions that the anticipated improvement there is far from guaranteed, considering a US interest rate hike might feed a vicious circle by accelerating capital outflow from emerging markets (EM), prompting further weakness in EM currencies. “This, in turn, could lead to possible corporate debt service problems, particularly given the sharp rise in hard currency corporate debt levels,” he added.

Looking forward to the investment strategy in 2016, SSGA prefers developed market equities, excluding the US, especially European small caps and domestic cyclical theme stocks, while remaining bearish on global government bonds. Meanwhile, it forecasts consumer-related sectors and asset classes with a reasonable risk-adjusted yield to outperform and interest rate-exposed sectors and asset classes to under-perform. BM