Why 2016 Could Be A Fickle Year
By Owain Bennallack - Wednesday, 6 January, 2016
From BRICs to ISAs, FANG to QE, the financial world loves a good ACRONYM (or A Concise Reduction Obliquely Naming Your Meaning, as some wag put it).
FANG, incidentally, was one of the big stories of 2015.
The acronym refers to a quartet of companies from among the handful of US technology stocks that delivered pretty much all the gains in the US S&P 500 index in 2015 – Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ: GOOGL) (the latter since renamed Alphabet, but who wants to write headlines about “being bitten by the FANA bug”?)
Of course we UK investors only profited from FANG if we put money to work in the States – either by buying the US-listed shares directly or via a relevant fund.
Instead, many domestic portfolios were trashed by the BAG shares – BHP Billiton (LSE:BLT), Anglo American (LSE:AA.) and Glencore (LSE:GLEN) – and others in the commodity sector.
As some of the (former) biggest beasts of the FTSE 100 – and the three biggest losers in 2015 – the trashed BAG shares were a big reason why our leading index was negative for the year.
Hum if you know this one
The best acronyms – if you’re a connoisseur of their frequent idiocy, you understand – are those that aren’t even really acronyms.
Take that staple of the US military, the armoured personnel carrier known as the HUMVEE.
We’ve all seen the Humvee in war films, or on the local news when a resident of picturesque English village enrages his neighbours by buying a decommissioned one on eBay and then parking it on the village green.
But did you know Humvee comes from ‘High-Mobility Multi-Purpose Wheeled Vehicle’?
We should be calling it the HMMPWV!
But that would be a right mouthful on the battlefield, so Humvee it is.
I don’t blame you (I’m just bluffing to justify my own slightly tongue-in-cheek acronym) but really, do you want me to predict a FICCEL 2016?
Nobody wants that.
So in the best tradition of a kludged acronym, I give you FICKLE.
FICKLE is a sextet of factors to watch in 2016 that could well shape our returns as much as the FANG or BAG shares did this year.
Provided, that is, another acronym, BREXIT, doesn’t derail everything…
The Fixed Income curveball
As I’ve already hinted at, FICKLE is inspired by FICC, the banking acronym that refers to Fixed Income, Currencies and Commodities.
Actually, FICC trading at the banks could itself determine much of the fate of the FTSE 100, given how the likes of Barclays (LSE: BARC) are still suffering from low returns from these operations.
But the four elements of FICC could be much more influential than that.
Fixed Income in FICC refers to bonds – government bonds, corporate bonds, and all the more exotic variations dreamed over the years.
Now you probably know the US Federal Reserve has just raised the sole interest rate it directly sets – the Federal Funds Rate – by 0.25%.
It’s the first such increase since 2006, and it comes after many years of the near-zero interest rate policy that followed the financial crisis.
Anticipating this single rate rise prompted many big moves in 2015.
But if and when the Federal Reserve piles on a few more rises, we can probably expect much more drama from the bond market.
Why does that matter?
For too many reasons for this one article, but the biggest one is that all other investments are, in theory, priced with respect to the yield on US government bonds – the so-called risk-free rate in the world’s reserve currency.
As the Federal Reserve raises the Fed Funds Rate, it will influence bond prices and yields across the spectrum – and so likely eventually impact equity markets, too.
What will that impact be?
2016 could be the year we find out.
Slipping and sliding
As for Currencies and Commodities – the CC in FICC – they will also be at front of mind in 2016.
Given the impact falling oil prices had on FTSE 100 giants like BP (LSE: BP) and Shell (LSE: RDSB) in 2015, the fact that commodities and our stock market are closely coupled is now news to nobody.
If commodity prices rebound in 2016 – even modestly in the case of oil – then the FTSE 100 might start to catch up on years of relative underperformance against its international rivals.
On the other hand, if commodity prices continue to flounder, it could be another difficult year for our benchmark index.
As for Currencies, the “in/out” referendum on UK membership of the European Union is expected in summer.
I expect the pound to gyrate with the politics beforehand.
But such wobbles will be nothing compared to what will happen if we vote to leave the EU.
A run on the pound is not out of the question.
The Bank of England might then raise interest rates (which takes us back to Fixed Income) to try to shore up the pound if such weakness threatened inflation, which could be catastrophic for the economy.
What if the housing bubble bursts?
Rapidly rising interest rates could be disastrous for the UK because consumers still seem very over-levered to me.
Leverage is the ‘L’ in my FICKLE acronym. (It’s essentially a fancy financial word for debt.)
Consumer borrowing is back to pre-financial crisis levels, and house prices have never looked so elevated compared to earnings.
Particularly in the South East, I suspect the resultant huge mortgages only appear affordable because interest rates are very low.
If interest rates rise too quickly – maybe as a result of a shock like Brexit – the results will not be pretty.
Of course leverage has been an issue for years now. From countries like Greece to indebted American fracking firms, concerns about excessive borrowing are behind many bearish narratives.
I don’t expect a catastrophic day of reckoning anytime soon.
But I wouldn’t rule it out if interest rates were to soar unexpectedly in the wake of a political upset like Brexit.
FICKLE not fatal
The last actor in my anticipated FICKLE 2016 is Emerging markets (hey – FICKLE is pronounced with a silent ‘markets’!)
Fears of an emerging market crisis dogged us throughout 2015, and they could persist in 2016 because all the themes I’ve spoken about play into this one.
Emerging markets have seen their currencies plunge because traders have anticipated US interest rate rises sucking investment and cash out of their economies.
Many emerging economies were further hammered by the fall in commodity prices, too.
Still, the dictionary defines “fickle” as “likely to change, especially due to caprice, irresolution, or instability”.
And that’s why FICKLE is my theme for 2016.
You see, I don’t think any of these factors will definitely spell doom in 2016.
One reason for optimism is a lot of bad news seems to be priced in.
Emerging markets have already fallen enough to make them look cheap by some measures, for example.
And the oil price already seems unsustainably low.
What’s more, no investor has a crystal ball. It is easy to dream up bad outcomes, but often enough the economy – and the markets – muddle through.
Oil could rebound, investors could take US interest rate rises in their stride, and emerging markets could surprise us with their vigour.
That could all make 2016 a better year for shareholders in the UK’s biggest companies than 2015 proved to be.
Even a Brexit might not be terrible news for UK investors, given that FTSE 100 firms generate around three-quarters of their revenues overseas, and so could benefit from a weaker pound.
See, I told you… Fickle!
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Owain owns shares in Amazon, Barclays, BHP Billiton, BP, and Royal Dutch Shell. The Motley Fool UK owns shares in Google and has recommended shares in Barclays.
From BRICs to ISAs, FANG to QE, the financial world loves a good ACRONYM (or A Concise Reduction Obliquely Naming Your Meaning, as some wag put it). FANG, incidentally, was one of the big stories of 2015. The acronym refers to a quartet of companies from among the handful of US technology stocks that delivered pretty much all the gains in the US S&P 500 index in 2015 ? Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ: GOOGL) (the latter since renamed Alphabet, but who wants to write headlines about “being bitten by the FANA…